Mortgage rates are rising across Britain after the country's borrowing costs hit their highest level in nearly three decades this week, prompting lenders including Coventry Building Society to raise prices and brokers to warn of further increases to come.
The turmoil has been driven by fears that interest rates may need to rise because of inflation triggered by a flare-up in the conflict between the United States and Iran in the Middle East. The volatile political climate, Labour's struggle to balance the books, and the looming first Budget for Prime Minister Andy Burnham and Chancellor John Healey on October 28 have added to the pressure on UK borrowing costs.
The yield on 30-year UK government bonds, known as gilts, hit 5.94 per cent in mid-week, its highest level since 1998, while ten-year gilts reached 5.26 per cent, the highest since the 2008 financial crisis. Yields have eased slightly since, but concerns remain over the future path of inflation and interest rates.
Oil prices have also climbed, with Brent crude rising to $97.62 a barrel, and the boss of British Gas owner Centrica warned about gas storage and energy prices on Thursday morning.
Higher gilt yields push up banks' borrowing costs, which they pass on to mortgage customers. Sonia swap rates, the inter-bank lending rate that underpins fixed mortgage pricing, are close to 4.5 per cent, up from 3.97 per cent at the end of June.
David Stirling, an independent financial adviser at Mint Wealth, said the market was doing what it always does when geopolitical risk flares up: money markets get nervous, gilt yields move, and swap rates, which actually price a fixed mortgage, shift within days. He said Coventry would not be the last lender to reprice, since lenders watch each other closely and tend to follow within a week to avoid being left with the cheapest rate on the market.
Locking in a rate early
Borrowers can reserve a new mortgage offer as early as six months before their current deal ends, though some lenders limit this to three months. Anyone with a deal ending in March 2027 or earlier should try to lock in a rate now, since it is usually possible to switch to a cheaper deal later if rates fall before the new mortgage begins.
Borrowers are advised not to automatically remortgage with their existing lender, as cheaper deals may be available elsewhere. Even a rate 0.1 percentage points lower than a lender's best offer could save hundreds of pounds a year.
Brokers warn against waiting
Doing nothing is the worst option, since anyone who lets a fixed deal expire without remortgaging falls onto their lender's standard variable rate, which can reach 7 per cent or higher.
Craig Fish, director at London-based Lodestone Mortgages, said everyone was living on a knife edge and that anyone whose deal ends within six months should act now, because waiting is how people get hurt. He said the days of chasing rock-bottom rates were gone, and that those who move early are the ones who stay in one piece.
Overpaying with savings
Borrowers worried about rising payments could use savings to pay down part of the mortgage or make extra monthly payments. Reducing the balance can secure a cheaper rate, since lenders reward bigger equity stakes, with pricing typically improving at 10, 15, 20, 25 and 40 per cent equity. Most fixed deals allow overpayments of up to 10 per cent of the outstanding balance a year, some up to 20 per cent, beyond which an early repayment charge may apply.
Lengthening the mortgage term
Extending the mortgage term at remortgage can lower monthly costs, though it increases the total interest paid. On a £200,000 mortgage at 4.75 per cent, a 20-year term costs £1,292 a month and £310,067 in total, while a 35-year term costs £977 a month but £410,396 in total, £110,212 more overall.
Switching to interest-only
Switching to an interest-only mortgage lowers monthly payments because borrowers pay only the interest, not the loan itself, which must be repaid in full at the end of the term. It is possible to fix on interest-only for two or five years before switching back to repayment, but borrowers face stricter lending criteria and are advised to consult a broker first.
Weighing up a tracker mortgage
Tracker mortgages follow the Bank of England base rate plus a set margin. The lowest two-year tracker for remortgaging is 4.04 per cent, against 4.47 per cent for the lowest two-year fix and 4.65 per cent for the lowest five-year fix, meaning the base rate would need to rise to 4.25 per cent for some trackers to lose their advantage. Trackers also typically carry no early repayment charges.
Nicholas Mendes of broker John Charcol said the Bank of England held its base rate at 3.75 per cent in July, with another hold widely expected at its next decision on September 17, making a tracker a harder sell. He said a tracker taken out today was more likely to get more expensive than cheaper over its early life, though trackers still suited those planning to sell or remortgage within a year or two.
Advice for home buyers
Home buyers now need to put down £18,200 more on their deposit than at the start of the year to offset higher mortgage rates, according to analysis by Zoopla, before accounting for any further rate rises. Mendes advised buyers to get affordability checked early and move to a full application as soon as a property is found, since that is when a rate is reserved, typically for six months while the purchase goes through.
