Two-year fixed mortgage rates have hit a 15-year high as they exceed the level reached at the peak of the mini-budget fallout in October of last year.
The current average two-year fixed rate is now 6.66 percent, according to Moneyfacts.
On October 20 of last year, the average peaked at 6.65 percent. At the same time, the five-year rate peaked at 6.51 percent, before both began to fall the next day.
Before the mini-budget, the last time rates had been this high was August 2008.
Borrowers who sign up for a five-year fixed rate can currently expect to pay an average interest rate of 6.17 percent, still below the level seen in October.
Up and up: Average mortgage rates have now risen above their previous peak after Liz Truss’s disastrous mini-budget
Stubbornly high inflation, coupled with strong labor markets, have led the Bank of England to continue raising its base rate, which in turn has raised the cost of borrowing.
The June hike was expected to be the last of this cycle as rising interest rates continue to put pressure on borrowers, but the bank is now expected to raise its rate to address inflation.
The market now expects the base rate to reach 6.5 percent, which would likely push some mortgage rates above 7 percent.
But during the first months of this year the rates were falling. We take a look at what has happened and when mortgage rates may start to fall again.
Why are mortgage rates going up?
Rates rose sharply last fall in the wake of then-Prime Minister Liz Truss’ disastrous mini-budget as credit markets reacted to a list of unfunded tax cuts. But then they fell in the first half of 2023, when a new chancellor and prime minister reversed most of the announcements.
However, the economy has continued to be plagued by high inflation and exacerbated by strong employment and wage figures that forced the Bank of England to raise interest rates.
On June 22, the bank’s Monetary Policy Committee voted to raise the base rate by 0.5 percent to 5 percent, its 13th consecutive hike. It is now expected to continue raising the rate until the end of this year as it struggles to hit its 2 percent inflation target.
About 1.4 million fixed-rate mortgage holders need to remortgage this year and will face a mortgage shock as they sign up for much higher rates than their current loan.
The rising cost of borrowing is putting further pressure on households.
Over the past week, major lenders including Natwest, Barclays and Virgin Money have raised rates on mortgage products as they struggle to keep them in line with exchange rates.
Sonya swaps (short for a type of financial product called interest rate swaps) play an important role in the price of mortgages.
When setting rates for fixed-rate mortgages, banks use exchange rates equal to the length of the loan they offer, such as two or five years, to determine your cost of financing. They will also add your margin.
Swap rates are forward looking, reflecting where the market expects the rate to be during that period to help banks ensure they don’t lose money if rates rise.
Currently, the two-year swap rate is close to 6 percent and the five-year rate is 5.2 percent.
When will rates start to drop?
Current projections for when rates will fall are uncertain. While the Government and the Bank of England expect inflation to ease in the second half of 2023, there are no guarantees.
Additionally, the market currently expects the base rate to continue to rise next year.
Liz Truss resigned as Prime Minister when credit markets reacted violently to her mini-budget of unfunded tax cuts, causing the cost of borrowing to skyrocket.
Elliott Culley, director of mortgage broker Switch Mortgage Finance, said: “Unfortunately, based on current forecasts, rates have not yet peaked. Five-year fixed rates have been and continue to be cheaper than two-year fixed rates, and some clients have decided to lock in longer due to the uncertainty of the outlook.
‘There are still 5-year fixed rates below 6 per cent and clients should remember that this is an average rate.
Current predictions still show rates should come down by the end of 2024, though not to the low levels seen in the past. So we see more customers opting for a 2-year flat rate in the hope that 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 increases in bond yields, swap rates and other money market rates on almost everything sterling denominated. .
“It sounds a lot like a market contraction, logic suggests it has to end eventually, and such contractions often end in a crash. However, it certainly doesn’t feel that way for lenders, brokers and borrowers who are facing an ever-advancing market.
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