Average 2-year mortgage rate goes over 6%

The average interest rate on a fixed mortgage with a term of 2 years has risen above 6 percent for the first time since December last year.

Borrowers who take out a two-year fixed rate now pay an average of 6.01 percent for the loan, according to Moneyfacts, up from 5.98 percent on Friday.

Interest rates on five-year fixed deals have also risen, averaging 5.67 percent now, compared to 5.62 percent on Friday.

However, Prime Minister Rishi Sunak has dismissed suggestions that the government should take action to support borrowers.

The difference between the two rates reflects market sentiment that interest rates will be lower in five years than in two years.

Mortgage rates have risen sharply in recent weeks as financial markets bet on further rate hikes from the Bank of England to tackle inflation.

Despite data in May showing inflation fell from double digits to 8.7 percent, the rate was still higher than expected against a background of rising wages, a tight labor market and meager economic growth, leading markets to change key interest rates from the Bank of England priced in.

Raising rates is the only tool the central bank has in its arsenal to curb stubbornly high inflation, despite warnings that future hikes could lead to a recession in the UK.

Swap rates – the main basis for fixed mortgage prices – are currently volatile ahead of this week’s inflation announcement and the central bank’s key interest rate decision on Thursday.

MortgageShop advisor Gary Bush said: ‘Sonia’s 2-year swap rate is currently 5.435 per cent, so it’s sadly clear that UK mortgage lenders are still overreacting.

“All financial advisors can do right now is feel sorry for applicants trying to get trades settled.

“We just can’t get to Wednesday’s inflation rate announcement soon enough.”

The market is currently calculating a rate increase of 0.25 percent, from 4.5 percent to 4.75 percent. If it continues, it would be the thirteenth consecutive increase and the highest level since 2008.

Mortgage rates fell for the first five months of this year after peaking in October when the cost of borrowing soared due to Liz Truss’ mini budget.

Her list of unfunded tax cuts saw the average mortgage rate peak on Oct. 20 at 6.65 percent for a two-year fix and 6.61 percent for a five-year deal.

From then on, however, rates steadily declined. In February, platform mortgages offered a five-year fix of 3.75 percent, even though the rate lasted less than 48 hours.

The likelihood of further hikes in base rates has prompted warnings that the move would risk a recession in the UK and a significant fall in house prices as around 800,000 homeowners will have to re-mortgage at higher rates next year.

Justin Moy, general manager at EHF Mortgages, said: ‘A quick check of Halifax’s 2-year fixed deals this morning suggests a range of 5.4 percent to 5.5 percent for most loan-to-value bonds if you are looking for a new mortgage.’

Up: Mortgage interest rates have fallen steadily since the end of 2022, but have risen again after disappointing inflation figures

This range is reflected in more detailed Moneyfacts averages.

The average two-year fixed rate for a 10 percent deposit mortgage is 6.13 percent, while that for a 40 percent deposit is 5.65 percent.

Similarly, for a five-year fix with a 10 percent down payment, the average rate is currently 5.7 percent, but for a 40 percent down payment, it drops to 5.3 percent.

“It’s a tough time, though,” added Moy. “We are all hanging on to the words and deeds of the Government and the Bank of England this week.

“We can only hope that the inflation figures are better than expected and that the Bank of England is still cautious about further increases for the time being.”

Property asking prices fell by just £82 in June, according to Rightmove, despite the chaos on mortgage rates.