UK fixed mortgage rates are rising ahead of this week’s Bank of England interest rate decision, highlighting the growing pressure on borrowers even if policymakers opt to leave the base rate unchanged.
The average two-year fixed residential mortgage rate reached 5.73 per cent on Tuesday, up from 5.68 per cent the previous day and its highest level since May 28, according to financial information provider Moneyfacts.
The average five-year fixed rate also increased to 5.78 per cent from 5.73 per cent, its highest level since April 12.
The moves come ahead of the Bank’s latest monetary policy decision on Thursday. The base rate is currently 3.75 per cent, with some economists and financial commentators expecting policymakers to hold rates steady. But renewed concerns over inflation have raised the prospect of borrowing costs remaining elevated for longer, or even increasing in the coming months.
Moneyfacts said some lenders had raised mortgage rates twice during September as higher swap rates increased the cost of pricing fixed-rate loans.
The number of mortgage products available to homeowners has also fallen. Moneyfacts counted 7,426 residential mortgage products on Tuesday, down from 7,458 the previous day.
Rachel Springall, finance expert at Moneyfactscompare.co.uk, said: “A second wave of mortgage rate hikes has begun from the major banks in reaction to growing concerns surrounding inflationary pressures.”
She added: “It is highly likely other lenders will follow suit to adjust rates, and with some deals withdrawn from the market, it is expected any returning deals could well be priced higher.”
The increase underlines the fact that fixed mortgage rates do not move mechanically with the Bank of England’s official rate. They are also influenced by financial market expectations and swap rates, which reflect the cost at which lenders hedge future borrowing.
Springall said the latest developments demonstrated “how fixed mortgage rates are not intrinsically linked to adjustments to the Bank of England base rate”.
Even if the central bank leaves its policy rate unchanged this week, households refinancing mortgages could therefore face higher costs.
“The mortgage pain shows no sign of easing for those borrowers who cannot yet lock into a new deal, particularly those with a five-year fixed who are not due to refinance until 2027,” Springall said.
She warned that borrowers coming off historically cheap fixed-rate deals could face a significant increase in monthly payments.
“Back in February 2022, there were sub-2% fixed mortgages available, so moving off this rate will be a huge shock for borrowers.”
Springall urged lenders and brokers to help customers understand the consequences of leaving existing deals early, including potential early repayment charges.
“In the meantime, it is vital that lenders and brokers help customers understand the implications of ending their deal early, such as the early repayment charges.”
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