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UK mortgage rates rise at fastest pace in a decade

According to data from the Bank of England, UK mortgage rates rose at their fastest pace in a decade in the six months to May, fueling expectations that the country’s housing market is cooling after a pandemic-induced boom.

Figures released Friday show that the average interest rate on newly taken out mortgages rose by 13 basis points to 1.95 percent in May. This is 46 basis points above the November rate, the fastest increase in six months since 2012.

The average quoted interest rate for a two-year fixed-rate mortgage with a loan-to-value ratio of 75 percent rose to 2.63 percent in May, from a low of 1.2 percent eight months earlier — the fastest rise in a such period since records began in 1995.

Line chart of % with UK mortgage rates for a 2 year fixed rate mortgage with a 75 per cent loan-to-value ratio that has skyrocketed

The interest on existing mortgages also rose by 2 basis points in May to 2.07 percent.

The data confirms that mortgage lenders are passing on the rate hikes passed during the last five BoE meetings.

Markets expect the BoE to continue raising interest rates from the current 1.25 percent to 3 percent in February next year as the central bank faces its highest inflation rate in four decades, suggesting the housing market may soon regain momentum. will lose.

With interest rates rising and the cost of living rising, consultancy Oxford Economics predicts house price growth will fall from its current 10 percent to negative territory from the end of next year, contracting until 2024.

Column chart of annual percentage change showing Oxford Economics' forecasts that UK house prices will fall

Rising mortgage rates coupled with record house prices mean the proportion of new buyers’ income spent on monthly mortgage payments “will rise,” said Samuel Tombs, chief economist in the UK at Pantheon Macroeconomics.

Separate data from mortgage lender Nationwide shows that payments have already risen relative to payment, reaching 32 percent in the second quarter of this year, from 27 percent in the third quarter of 2020.

Given the intense pressure on household disposable income due to the rise in the cost of basic necessities, and the current record low level of consumer confidence, “home buyers are sure to decline in the second half of this year,” Tombs added.

For now, however, house prices are being supported by the strong UK labor market, low housing supply and buyers rushing to close mortgage deals before rates rise any further.

“With the prospect of higher mortgage rates on the map, buyers are taking advantage of the last remaining lower rates before the inevitable spike, with those refinancing desperate for a fixed-term mortgage for as long as possible,” said Tomer Aboody, director. real estate provider MT Finance.

This is corroborated by BoE data, which showed net mortgage lending rose to £7.4bn in May, from £4.2bn in April and above the pre-pandemic average of £4.3bn over 12 months to February 2020 .

The data also showed that home purchase approvals rose to 66,200 in May, up from 66,100 in April — just slightly below the pre-pandemic average of 66,700 in the 12 months to February 2020.

“Rates are rising at the rate of knots, and people are coming in as long as they can, and repairing for as long as they can, whether it’s a home purchase or a re-mortgage,” said Andrew Montlake, principal of mortgage broker Coreco.

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