Average two-year fixed rates have nearly tripled since last year
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Mortgage rates soared in the final months of 2022, signalling an end of the era of cheap home loans.
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While prices have since dropped, many homeowners will face a “painful, though hopefully not ruinous, payment jump” when their existing fixed-rate deals expire this year, wrote John Stepek at Bloomberg’s Money Distilled.
High inflation was already pushing mortgage rates up “gradually” last year, said financial website This Is Money. But it was the unfunded tax cuts in the September mini-budget put forward by Liz Truss and Kwasi Kwarteng that really threw housing and financial markets into “disarray”, said The Guardian.
Rates skyrocketed from their “historic” lows of even less than 1% in the summer of 2021, said This Is Money, peaking at 6.65% in October. They have come down some but “still stand higher compared to a year ago”, said Moneyfacts.
All of this is making life more difficult for homeowners, and those hoping to get on the property ladder.
What determines mortgage rates?
Lenders consider a range of factors when setting their mortgage rates, including what competing lenders are offering and the cost of getting the money needed from the financial or wholesale markets to fund the loans.
“The cheaper things are for the lender, the lower its rates can be,” explained Which?.
Another factor is the cost of borrowing, known as the interest rate, which is set by the Bank of England (BoE) base rate.
If the Bank’s interest rate rises, home loans will usually become more expensive as lenders “pass on the increase in the bank rate to their customers”, said MoneySuperMarket. So a higher base rate usually translates to higher monthly mortgage payments.
Are mortgages still getting more expensive?
Since Rishi Sunak became prime minister, the markets have calmed and lenders have started removing the so-called “Truss premium” from their mortgage products, said Reuters.
Both the average two- and five-year fixed rates fell for the second month running at the start of January 2023, down to 5.79% and 5.63% respectively, said Moneyfacts.
But other pressures remain, said The Times, with BoE governor Andrew Bailey telling the newspaper that “interest rates would have to rise further” to combat inflation. The BoE’s Monetary Policy Committee raised rates from 3% to 3.5% in December.
About three-quarters of UK homeowners are on fixed-rate deals, meaning their monthly payments remain the same for a set period of time. For these borrowers, the interest-rate changes “will have no effect on their mortgage rate in the short term”, according to banking trade body UK Finance.
But more than 1.4 million households in the UK are facing the prospect of “a significant increase in their monthly mortgage payments” when they have to refinance, Bloomberg’s Stepek said.
The majority of mortgages coming up for renewal in 2023 were fixed at interest rates below 2%, according to the Office for National Statistics (ONS). If someone with a £100,000 mortgage sees their rate jump from 2% to the “reasonably conservative” estimate of 4%, Stepek explained, “that would add £100 a month to your payments, a 25% increase”.
Average mortgage interest rates are expected to settle at between 4% and 5% this year, assuming “inflation has peaked and the Bank of England will slow its base rate rises as a result”, said This Is Money. Experts expect the BoE to ease up on the base rate in the second quarter of 2024, Bloomberg reported.
Lenders could lower rates even further if the base rate peaks at around 4.5% in early 2023, below the 6% initially projected in September 2022. But even so, rates are “likely to remain sticky”, said Bloomberg economist Niraj Shah. “We may have to get used to a ‘new normal’ as we are unlikely to see the ultra-low interest rates we had all got used to.”
Which mortgage should you choose?
There are two main mortgage products: fixed rates and trackers.
Fixed-rate borrowers pay a set amount each month for a defined period, which can make it easier to budget and means your payments remain steady even if interest rates rise, saidMoney.co.uk.
This may sound attractive when rates are low, but “think carefully before committing for too long as some fixed-rate mortgages may have an early repayment charge”, the financial website said. Plus, if interest rates go down during the fixed-rate period, your payments won’t, the website added.
A tracker mortgage usually follows the BoE’s base rate. Tracker rates are currently priced lower than fixed deals, but there is always the risk that rates will rise even higher, “leaving you gambling if you don’t fix, because then you will be at the mercy of a higher tracker, therefore higher mortgage repayments”, warned Online Mortgage Advisor.
One way for borrowers to “try and ensure stability in their home finances” is to “think long-term when selecting their mortgage deals”, as the rates are usually lower than shorter fixes, said Unbiased.
Some buyers may be tempted to wait and see if mortgage rates drop further this year, but not everyone thinks that is a good idea. Borrowers who sit tight hoping for continued reductions will “need to think about how a rising base rate will affect their holding position”, David Hollingworth of L&C Mortgages told the i news site.
How to boost your chances of getting your mortgage approved
Lenders will typically use an income multiple of 4-4.5 times salary per person when assessing a mortgage application, sometimes rising to 5 or 5.5 times for higher earners, saidThe Times Money Mentor, but you will need to pass tough affordability tests.
This involves examining your income and outgoings. So “the more money you spend each month, the less you might be able to borrow”, the website said.
You can boost your chances of getting a mortgage by checking your credit report – a record of all your debts such as loans and credit cards and how good you are at making repayments.
These reports are compiled by providers such as Experian, Equifax and TransUnion and calculate a credit score based on the debts you have and your repayment history as well as whether you have ever been made bankrupt or received county court judgments.
The report gives a lender an idea of whether you are a responsible, reliable borrower and likely to repay the debt. “Usually, a higher score means you’re seen as lower risk,” said Experian.
You can improve your creditworthiness by making payments on loans, credit cards and bills on time and by getting on the electoral register so lenders can verify who you are, said Equifax.
Be careful, though, as making lots of applications may suggest to lenders that you are reliant on credit, so if you plan on applying for a mortgage, “it might be helpful to be selective about what other loan applications you make”, Equifax added.
How to find support if you are struggling to pay your mortgage
Around 770,000 households are either at risk of a mortgage shortfall over the next two years or are already behind with payments due to being “sensitive to changes in interest rates”, City watchdog the Financial Conduct Authority (FCA) warned.
UK Finance has said lenders are committed to helping customers who might be struggling with their mortgage payments, “with a range of tailored support available”.
The organisation said anyone who is concerned about their finances “should contact their lender as soon as possible to discuss the options available to help”, reported Yahoo Finance.
Support may include temporary payment arrangements, lengthening the term of your mortgage, or switching temporarily to interest-only repayments, said MoneyHelper.
You can also get free housing advice from Shelter and support on managing debts from charities such as National Debtline and StepChange, added MoneyHelper.
Benefit claimants, such as those on Universal Credit, may be able to get help with some of their monthly repayments through the government’s Support for Mortgage Interest (SMI) scheme.
Before making major mortgage changes, brokers suggest making personal spending cuts. “Many of us are more financially stable than we think we are when we look closely,” Carmen Green, mortgage and protection adviser at Xpressmortgages, told FTAdviser. “Changing to interest-only or taking payment holidays could just delay the problem for many, rather than solve it.”
Marc Shoffman is an award-winning freelance journalist, specialising in business, property and personal finance. He has a master’s degree in financial journalism from City University and has previously worked for the FT’s Financial Adviser, the financial podcast In For a Penny and MoneyWeek.
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|Loan Type||10-Year Treasury Note High Yield||Fixed Interest Rate|
|Direct Subsidized Loans and Direct Unsubsidized Loans for Undergraduate Students||3.448%||5.50%|
|Direct Unsubsidized Loans for Graduate and Professional Students||3.448%||7.05%|
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Mortgage Rate Predictions For 2023
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