Whether you already own a property, are currently in the process of buying or are thinking about getting onto the ladder in the near future, you’ve probably heard lots in the news about mortgage rate changes in recent times. We take a look at what has been happening to UK mortgage rates and what this could mean for home buyers over the next few months.
Why are mortgage rates currently so high?
Just over twelve months ago, at the time of writing, the Bank of England base rate was sat at 0.1% in November 2021. Since then, there have been eight rises, so the current level is 4%; the highest it has been since November 2008. Interest rates are rising in response to inflation, as a measure that is intended to slow things down. However, until this happens, which could be some way off, experts believe that interest rates are likely to continue to rise over the next few months, well into 2023.
This is a major reason why many low-interest mortgage deals available a year ago now seem like a distant memory. An average mortgage rate on 75% LTV in early November 2021 was 1.29% for a 2-year fix, and for 90% LTV (the most common ratio for first-time buyers), the average rate stood at 2.97%. In November 2022, the same deal average rates stand at 6.01% and 6.21% respectively, according to Twindig’s latest stats.
Rising interest rates isn’t the only thing that influences mortgage rates. There are numerous factors that can have an impact on the rates that lenders are prepared to offer to those buying or remortgaging their home, or people coming to the end of their current mortgage deal. These include domestic political uncertainty, such as the recent Conservative Party leadership, cabinet and policy changes and international issues, such as Russia’s war in Ukraine.
If mortgage lenders deem that a particular mortgage deal they are currently offering is no longer profitable for them, they can remove the deal from the market, which is what we saw happening on a large scale during September 2022, in response to the impact of the government’s so-called ‘mini budget’; over 40% of all mortgages were removed from the market within a week.
When they started bringing back mortgage deals, the interest rate levels were considerably higher than before.
How do changing mortgage rates affect those in the process of buying a home?
Lenders will honour a mortgage offer that they have already agreed with a buyer once the application has been accepted and any upfront fees have been paid. There is usually a maximum period of six months in which the transaction must be completed. If the process takes longer than this, they may require the buyer to make a new mortgage application. Under the current circumstances, this would almost certainly be for a different deal with a higher rate than the original offer.
However, even though lenders will generally honour the original agreed rate for the six months, they can withdraw the offer if there is a ‘material change’ in the circumstances of the situation. This could be that the value of the property has reduced due to changes in the market or another issue that has come to light, or might involve the circumstances of the borrower e.g. changes to their guaranteed income since the mortgage application was made.
If you only have an agreement in principle (AIP) from a lender and are yet to officially apply for the mortgage to purchase a specific property, you won’t have a rate already locked in and will therefore only be able to choose from the mortgage products available on the day you apply.
As the mortgage rates are higher than previously, this affects the monthly repayments and can have an impact on how much a buyer is able to borrow to buy their home. This could mean that buyers who were previously looking at homes of a certain value might have to reduce this in order for a mortgage to be deemed ‘affordable’ for them by lenders. Lenders are also likely to be stricter about who they lend to, which might mean that getting a mortgage isn’t possible for some at the moment.
Is the cost-of-living crisis affecting new mortgages?
The cost-of-living crisis means that many people have less disposable income than they used to, with the cost of things such as energy, food and other essentials eating up more of their money each month and leaving less for a mortgage repayment. Lenders need to be sure that a borrower can afford the repayments before they offer them a mortgage, so they will check that buyers could still afford their monthly costs if interest rates continue to rise in the future.
This can mean that people are now only able to borrow less than they might have been previously, so can’t now buy a home that they thought they could afford when they started looking.
How do changing mortgage rates affect existing homeowners
For existing homeowners, the effect of changing mortgage rates will depend on a number of different factors, including:
- What type of mortgage deal they are currently on e.g. fixed, tracker, standard variable, discounted
- When their current deal is ending, if applicable
Those who are currently on a fixed-term mortgage won’t have any changes to their monthly repayments until the term comes to an end. At this point, they will automatically go onto their lender’s standard variable mortgage rate unless they either change product with their existing lender or remortgage. All of these three routes are likely to see a significant increase in the interest rate of their deal and therefore a rise in their mortgage repayments.
Those who are on a tracker, variable rate or discounted rate mortgage will likely have seen their repayments already go up, as the base rate of interest does. The amount of the rise will depend on how much you have borrowed and the specific terms of your new deal and lender rates.
Does all this mean that it’s a bad time to buy a home?
If you’re wondering whether now is the right time to buy, all of the uncertainty, along with the cost-of-living squeeze, can be daunting. However, it’s important to weigh up all sides of what is going on and make the decision that is right for you. There is no crystal ball that can see the future; however, based on things that have happened in the past, this is often a good way of predicting how the housing market and mortgages might change too over the next months and years.
Inflation, interest and mortgage rates are indeed high at the moment, but this usually followed by a notable drop in house prices, which could certainly benefit first-time buyers especially.
For those who are currently renting and deciding whether to buy, many landlords are increasing rents because of their own mortgage rises, so this could mean that even current mortgage deal repayments could be lower than rent costs over the next few years.
Whether or not it’s the right time to buy a home will always depend on your personal circumstances, so the best thing to do is to investigate the various costs as things stand and make a decision based on that.