How much will soaring mortgage rates cost you?
Average two-year fixed-term mortgage rates are now well above 6%, following the Bank of England’s latest rate hike.
Inflation remains stubbornly high, raising expectations that the bank’s rate setters will have to push interest rates to a much higher peak than previously anticipated.
An estimated 1.4 million borrowers are coming off their fixed rate mortgages this year and are facing significantly higher mortgage costs, with the Office for National Statistics stating that most renewal rate hikes are below 2 percent.
Homeowners brace for more pain as the Bank of England continues rate hikes
With interest rates expected to peak in late 2024 and then slowly decline, more borrowers could face major jumps in their monthly payments for some time to come.
So what does this mean in pounds and pence, and how bad could the rate hikes hit you when it comes time to re-mortgage?
We’ve crunched the numbers for several borrowers with our True Cost Mortgage Calculator, which you can also use for your own personal circumstances.
How much will an increase in mortgage interest cost you?
How borrowers will be affected by the interest rate hikes will depend on the value of their home, the amount of the mortgage, the remaining term of the loan, the interest they have now and the potential interest they can get.
With our mortgage interest deduction you can see which mortgage you can apply for based on your situation best mortgage rate finder tool powered by broker L&C.
For our calculations we used the average figures from Moneyfacts, which give a good picture of the market. However, you may be able to get a better deal.
Mortgages with higher equity
While no one will need to re-mortgage this year, they are likely to escape the pain of higher mortgage payments, but those with smaller loans are more isolated thanks to the size of their net worth.
The two-year average fixed interest rate for a borrower with 40 percent equity in their home — or 60 percent loan-to-value — is currently 6.06 percent, compared to 1.57 percent two years ago.
On a property worth £285,000, the current average UK house price according to the ONS, this homeowner is borrowing £171,000 excluding interest.
This means that if they signed a two-year flat rate in 2021 for a period of 25 years, they would have paid £689 per month. Assuming they have increased their net worth during that time, they will be looking for a new mortgage with a mortgage of £159,649.
If they switched to a two-year fixed-rate contract now, they would pay £1,034.48 per month.
Had they signed a five-year deal in June 2018, their monthly payments would have been £749.18 at a rate of 2.29 per cent.
If they remortgage their deal again today for five years, it would cost £996.66 a month at 5.67 per cent – or £2,969.76 more a year.
| To repair | Mortgage amount | Loan to value | Date | interest | Mortgage term | Monthly costs |
|---|---|---|---|---|---|---|
| Two years | 171,000 | 60% | 06/28/18 | 1.87% | 25 years | £714.02 |
| Two years | 171,000 | 60% | 28/06/21 | 1.57% | 25 years | £689.53 |
| Two years | 171,000 | 60% | 28/06/23 | 6.06% | 25 years | £1,108.04 |
| Five years | 171,000 | 60% | 06/28/18 | 2.29% | 25 years | £749.18 |
| Five years | 171,000 | 60% | 28/06/21 | 1.81% | 25 years | £709.08 |
| Five years | 171,000 | 60% | 28/06/23 | 5.67% | 25 years | £1,067.52 |
| *Table calculations based on the size of the loan at the start of the mortgage without taking into account any increase in equity | ||||||
L&C’s David Hollingworth told This is Money: ‘When the low fixed rate comes to an end there will be a price increase for all borrowers, but it’s important that they keep their focus and look to get the best fit for them .
Looking at the best rates will help lessen that burden and beat the “average.”
‘Getting advice on the options in a fast-moving market will help determine the right course of action for you.
“No one knows what will happen to rates in the future, so it’s crucial to do what works best for you, whether you think rates could fall or you’re more concerned about further increases and want to know where you stand.’
Mid-sized equity mortgages
Someone who chose to lock in their mortgage for two years in June 2021, with a 25 per cent down payment on a £285,000 property, could get a rate of 2.20 per cent, saving them around £926.95 per month cost.
For borrowers with 25 percent equity in their home, the current two-year average fixed interest rate is 6.18 percent.
The average fixed-rate mortgage with a term of two years is above 6% for the first time since December last year
If they switched to a new two-year deal today, their monthly payments would rise to £1,314.83 – an extra £387.88 per month.
In 2018, they would have been charged about 2.17 per cent interest on a five-year deal on the same terms, which would have cost them about £923.78 per month.
Assuming they paid off the loan, a new five-year deal at an average rate of 5.87 per cent taken today would cost them £1,143.74 a month. This is an additional £220 per month or £2,639.52 per year.
> Find out what this means for your mortgage using our Real cost mortgage calculator
| To repair | Mortgage amount | Loan to value | Date | interest | Mortgage term | Monthly costs |
|---|---|---|---|---|---|---|
| Two years | £213,750 | 75% | 06/28/18 | 2.31% | 25 years | £938.5 |
| Two years | £213,750 | 75% | 28/06/21 | 2.20% | 25 years | £926.95 |
| Two years | £213,750 | 75% | 28/06/23 | 6.18% | 25 years | £1,400.81 |
| Five years | £213,750 | 75% | 06/28/18 | 2.71% | 25 years | £981.68 |
| Five years | £213,750 | 75% | 28/06/21 | 2.42% | 25 years | £950.33 |
| Five years | £213,750 | 75% | 28/06/23 | 5.87% | 25 years | £1,360.26 |
| *Table calculations based on the size of the loan at the start of the mortgage without taking into account any increase in equity | ||||||
Low equity mortgages
For those with a small amount of equity in their homes, getting a mortgage or refinancing becomes more expensive
Currently, the average two-year fixed-rate mortgage at 90 percent loan-to-value is 6.28 percent, and for a five-year fix, it’s 5.74 percent.
Markets expect interest rates to fall over the longer term, which is why the five-year rate is cheaper than the two-year fixed rate.
If you had signed up for a two-year fixed rate with a 10 percent down payment in 2021, you would have paid about 3.23 percent interest.
At the current average property price, this works out to around £1,247 per month over a 25-year period.
Today the same deal would cost you £1,605.63 a month at an interest rate of 6.28 per cent.
| To repair | Mortgage amount | Loan to value | Date | interest | Mortgage term | Monthly costs |
|---|---|---|---|---|---|---|
| Two years | £256,500 | 90% | 06/28/18 | 2.73% | 25 years | £1,180.64 |
| Two years | £256,500 | 90% | 28/06/21 | 3.23% | 25 years | £1,116.14 |
| Two years | £256,500 | 90% | 28/06/23 | 6.28% | 25 years | £1,696.81 |
| Five years | £256,500 | 90% | 06/28/18 | 3.20% | 25 years | £1,243.20 |
| Five years | £256,500 | 90% | 28/06/21 | 3.55% | 25 years | £1,290.99 |
| Five years | £256,500 | 90% | 28/06/23 | 5.74% | 25 years | £1,612.11 |
| *Table calculations based on the size of the loan at the start of the mortgage without taking into account any increase in equity | ||||||
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