Two-year fixed mortgage rates hit 15-year high

Two-year fixed-term mortgage rates have reached a 15-year high, surpassing the level reached at the height of the mini-budget impact last October.

The current two-year average fixed rate is now 6.66 percent, according to Moneyfacts.

On October 20 last year, the average peaked at 6.65 percent. At the same time, the five-year interest rate peaked at 6.51 percent before both began falling the next day.

Before the mini-budget, the last time rates were this high was August 2008.

Borrowers who take out a five-year fixed rate today can currently expect an average interest rate of 6.17 percent, still below October levels.

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Stubbornly high inflation coupled with strong labor markets led the Bank of England to further raise its key interest rate, which in turn pushed up the cost of borrowing.

It had been hoped that the June rate hike would be the last of this cycle as rising interest rates continue to put pressure on borrowers, but the bank is now expected to raise rates to address inflation.

The market now expects the base rate to rise to 6.5 percent, which means that some mortgage rates are likely to exceed 7 percent.

But for the first few months of this year, rates fell. We look at what happened and when mortgage rates can start falling again.

Why are mortgage rates rising?

Rates rose dramatically last fall in the wake of then-Prime Minister Liz Truss’s disastrous mini-budget as credit markets reacted to a list of unfunded tax cuts. But they then fell in the first half of 2023, when a new chancellor and prime minister reversed most of the announcements.

However, the economy is still plagued by high inflation and exacerbated by strong employment and wage data that forced the Bank of England to raise rates.

On June 22, the bank’s Monetary Policy Committee voted to raise its base rate from 0.5 percent to 5 percent — its thirteenth consecutive increase. It is now expected to keep raising rates until the end of this year as it fights to meet its target of 2 percent inflation.

About 1.4 million fixed rate mortgage holders will need to take out a new mortgage this year and will face a mortgage shock as they take out much higher rates than their current loan.

Rising borrowing costs are putting pressure on households.

Over the past week, major lenders including Natwest, Barclays and Virgin Money have raised rates on mortgage products as they struggled to keep them in line with swap rates.

Sonia swaps (short for a type of financial product called interest rate swap rates) play a major role in mortgage pricing.

When setting rates for fixed-rate mortgages, banks use swap rates equal to the term of the loan they are offering – say two or five years – to determine their borrowing costs. They will also add their margin.

Swap rates are forward-looking and reflect where the market expects interest rates to be over that time period, so help banks make sure they don’t lose money if interest rates rise.

Currently, the two-year swap rate is almost 6 percent and the five-year rate is 5.2 percent.

When will rates start to drop?

Current projections for when interest rates will fall are uncertain. While the government and the Bank of England hope inflation will fall in the second half of 2023, there are no guarantees.

In addition, the market currently expects base rates to rise further next year.

Liz Truss resigned as Prime Minister as credit markets reacted violently to her mini budget of unfunded tax cuts, sending the cost of borrowing soaring

Elliott Culley, director at mortgage broker Switch Mortgage Finance said: ‘Unfortunately, according to current forecasts, rates have not yet reached their peak. A fixed interest rate of five years is and remains cheaper than a fixed interest period of two years and some customers have decided to take longer because of the uncertain outlook.

“There are still 5-year flat rates below 6 percent and customers should remember that this is an average rate.

“Current forecasts still show that rates should fall by the end of 2024, albeit not to the low levels of the past. So we see that more customers opt for a permanent contract of 2 years in the hope that the rates will be lower when it comes to their next renewal.’

Rob Gill, Managing Director of Altura Mortgage Finance added: ‘We are seeing a relentless rise in mortgage rates, driven by sharp rises in bond yields, swap rates and other money market rates in virtually everything denominated in British pounds.

“It feels very much like a market squeeze, the logic suggests it has to end eventually, and squeezes like that often end with a crash. But it certainly doesn’t feel that way for lenders, brokers and borrowers who are all facing a market that continues to go up.’