Mortgage rate rises mean half of borrowers face potential hike to 5%

Half of UK homeowners have fixed-rate mortgages due within the next two years, raising the risk of a market-wide mortgage shock.

Of those whose deals expire within the next two years, more than half (55 percent) are on a two-year fixed rate and 39 percent on a five-year fixed rate, according to research from The Mortgage Lender, the mortgage arm of Shawbrook Bank.

Many of these borrowers could be in for a shock as interest rates have risen sharply over the past year, driving up the cost of a mortgage significantly.

Mortgage rates hit an all-time low in the summer of 2021 as multiple major lenders offered loans at interest rates below 1 percent – ​​and those who set these cheap rates for two years will get another mortgage in the summer of 2023.

According to the latest estimates, typical mortgage rates will rise to 5 per cent by then, potentially adding hundreds of pounds a month to the cost of their mortgage.

Last July, HSBC offered a two-year fixed rate of 0.99 percent for those with a 40 percent down payment or equity. Santander and TSB offered similar deals, while the lowest rate offered was 0.87 percent from Nationwide.

Since then, mortgage rates have skyrocketed. On August 1, 2022, about a year later, the two-year average fixed rate for all deposits was 2.52 percent, according to data from Moneyfacts.

Rates then skyrocketed to an average of more than 6 percent in October this year in the wake of the ill-fated mini-budget, and while they are slowly falling now, are expected to remain between 4 and 5 percent. next year.

Someone with a £200,000 mortgage over 25 years would pay £754 at an interest rate of 1 per cent – but if that rate were to rise to 5 per cent, their monthly payment would skyrocket by £415 to £1,169. Over a fixed two-year period, it would cost them nearly £10,000 more.

Consumers are preparing for their mortgage payments to rise, with a quarter (25 percent) expecting their mortgage payments to rise, according to research by The Mortgage Lender.

For those who expect their mortgage rates to rise over the next two years, the average by which they expect their monthly mortgage payments to rise is £441.

The rise in mortgage costs comes amid the cost-of-living crisis, when household finances are under pressure from all sides as the cost of bills and food has risen at a breakneck pace.

As such, more than a quarter of mortgage holders say they wouldn’t be able to pay their monthly repayments if they increased by £100 a month, according to research from Citizens Advice.

Nearly half (45 per cent) said they would not be able to make their payments if they increased by £250 a month.

Steve Griffiths, head of sales at The Mortgage Lender, said: ‘Mortgage borrowers will continue to closely monitor the Bank of England’s key interest rate decisions over the coming months to see how this could affect their future borrowing costs.

‘A mortgage is one of the largest financial commitments an individual can take on, so it can be a difficult decision to make now whether or not you should take out a mortgage.

Fortunately, many borrowers are getting on top of potential higher costs by talking to their mortgage broker to find the best deals for them.

“Borrowers can check out their deals as early as six months before they expire, so it’s certainly a wise move to assess what options are available now.”

Turning off a flat rate on a tracker can be a more cost-effective option for people facing a mortgage shock.

Tracker mortgages follow the Bank of England base rate plus a fixed percentage. For example, you might see a mortgage advertised as “Basic +0.75 percent for two years”

Currently, tracker rates for two years are around 4 percent, compared to the current average with a fixed rate of 6.09 percent for the same duration.

And while the Bank of England’s base rate is expected to continue rising early next year, it currently stands at 3% following consecutive increases since December last year. There is still some way to go before trackers catch up with fixed rates.

Despite the current cost advantages, the decision to move to a floating rate ultimately comes down to the risk appetite of the borrower.

Matt Coulson of mortgage adviser at Heron Financial says: ‘While savings are possible in the short term, the situation is still volatile. In addition to the risk of tracker rates rising rapidly, there is also the concern that when you want to jump off a tracker, the fixed rates will be much higher than when you first got the mortgage.

‘It’s your own common sense; do you lie awake every night thinking, ‘If that percentage goes up, am I really in trouble? If the answer is yes, it might be worth accepting the certainty of a fixed rate, even if it costs a bit more.’

Mortgage holders may also be faced with less choice when they need to move to a new deal.

Currently, the number of mortgage deals available in the market is 41 percent lower than the same time last year, according to new data from real estate lending specialist Octane Capital.

There are currently an estimated 5,398 different mortgage products available, with first-time buyers (2,631) and movers (2,569) having slightly more choice than those looking to take out a new mortgage (2,302).

However, the analysis also shows that the level of available products is still up 18 percent compared to this time two years ago, at the height of the pandemic in the market.

In fact, first-time buyers are still benefiting from a 45 percent increase in product choice from 2020, with movers up 38 percent and acquirers up 20 percent.