Mortgage ‘turmoil’ as short-term rates overtake five-year deals

Short-term mortgage rates have surpassed longer-term rates, indicating growing market instability as rising global tensions weigh on the UK economy.

According to Moneyfacts, the average rate on a two-year fixed homeowner mortgage has risen to 5.56%, exceeding the average for five-year fixed mortgages at 5.54% .

This unusual reversal, described as pricing “turmoil,” reflects growing uncertainty about the future of interest rates, leading lenders to be more cautious about near-term risks.

Rachel Springall, a finance expert at Moneyfactscompare.co.uk, said: “The turmoil in fixed mortgage rate pricing has worsened, as ongoing hikes have made the two and five-year fixed rates invert, where five-year is slightly cheaper on average.

“Swap rates (which are used by lenders to price mortgages) have been inverted for a few days now, so it was only a matter of time for the market to catch up. There is hope this will be a temporary blip until the markets settle down, but it depends how long volatility prolongs.

“This is unusual, however it’s all down to how the markets foresee interest rate setting, many expect higher rates over the shorter-term.

“This abnormality happened after the fallout from the mini-budget, and it took around three years for the inversion to end.

“In a traditional market, the average two-year fixed deal would be lower than the five-year, but the unrest in the Middle East is causing concerns over path of interest rate setting, with inflation expected to spike in the months ahead.

“The damaging impact on the uncertainty surrounding the future of interest rates has also led to a drop of over 1,500 options from the residential mortgage market since the start of March, so there are less than 6,000 options, and if deals come back within the coming days, they will likely be at inflated rates to catch up with the current state of play.

“After all, a volatile mortgage market tends to be a more expensive one.”

This shift in rates occurs despite stable inflation data from the Office for National Statistics (ONS), which reported that Consumer Prices Index (CPI) inflation remained unchanged last month.

However, economists warn that this data has not yet fully captured the effects of the ongoing conflict in the Middle East on energy and food prices.

At the same time, the housing market is beginning to cool. ONS figures show that the average UK house price increased by 1.3% in the year to January, down from 1.9% in December. The current average property price stands at £268,000.

Regional differences in housing prices across the UK are significant:

• England: £290,000 (1.1% annual growth)
• Wales: £210,000 (2.0% annual growth)
• Scotland: £188,000 (1.3% annual growth)
• Northern Ireland: £196,000 (7.5% annual growth)

Analysts suggest that the inversion in mortgage rates indicates lenders anticipate short-term volatility, driven by rising energy prices and the potential for further interest rate hikes.

David Hollingworth, associate director at L&C Mortgages said the numbers “will be of little comfort to mortgage borrowers”.

He said: “The sharp change in outlook for inflation as a result of rising oil and gas prices has already sent mortgage rates substantially higher than at the beginning of March.

“Markets are anticipating that interest rates will remain higher for longer and are now factoring in interest rate rises.

“That’s a far cry from only a few weeks ago where an expectation of further cuts was the consensus.

“That swing is causing significant volatility and fixed-rate mortgages continue to be priced higher by lenders.

“Those hikes keep on coming as many lenders enter their third or fourth round of product changes in the last two to three weeks.

“That has seen a surge in borrowers rushing to lock in a rate before further increases take hold.

“Our figures show that the increase in the average of the best remortgage rates from the 10 biggest lenders means that a £200,000 mortgage on a two-year fixed-rate will cost almost £85 (per month) more now than at the beginning of the month.

“With prices at the pump already higher, borrowers will also be nervous about the increase in energy costs expected in coming months.

“Today’s figures are therefore likely be viewed as the calm before the storm by homeowners.”

As markets continue to process the economic consequences of global tensions, borrowers now face a more complicated—and potentially more expensive—decision-making process when choosing between short- and long-term fixed mortgage deals.