The average interest rate on a two-year fixed-rate mortgage deal has risen to 6.66% – a level that has not been seen since 2008 and the financial crisis.
This comes as prime minister Rishi Sunak declined to back extra monetary support for mortgage holders despite increasing costs, stating the priority is to bring inflation down.
It’s said mortgage providers said people fixing deals at rates now would typically face an increase of about £350 a month in their repayments.
Recent data from January released by Nationwide revealed that the affordability strain on borrowers’ pockets is nearing an all-time high as the building society says first-time buyers are spending as much as 39% of their income after tax on mortgage repayments based on an 80% LTV mortgage at 5.5% interest.
The average rate on a five-year deal, however, remains below the level seen after the mini-budget. The current level is 6.17%, compared to the peak last year of 6.51%.
Andrew Assam, homes director at Lloyds Banking Group, told MPs this was changing the plans of first-time buyers:
“People are either putting down a larger deposit or buying a smaller property because affordability is tighter. We won’t lend as much now, so people are moderating what they can afford to buy.”
Around 2.4 million fixed-rate mortgages are due to end between now and the end of 2024, according to figures from banking trade association UK Finance.
Commenting on the data, Charlotte Nixon, mortgage and financial planning expert at Quilter said:
“With the average two-year fixed mortgage rate hitting a devilish 6.66% according to Moneyfacts, many mortgage holders and potential house buyers must be wondering when the flames will die down and things start to look a bit more normal. Unfortunately, the UK is in a difficult place with its battle against inflation and as such interest rates are going to have to keep going up in the short-term. This is going to feed into the mortgage market and as such this is not the top of the peak – more pain is to come.
The chaos in the mortgage market is hitting house prices and this is going to cause some uncertainty over the rest of the year as servicing costs become harder to manage and affordability is tested to its limits. For those who have a fixed rate deal ending in the next six months, the message is clear – act now or you could face exorbitant costs on the standard variable rate that you will default on to. “
Nixon also stated that for those looking to take out a mortgage now, there are options to consider to “lesson the burden” – taking out a mortgage with a longer term can “help reduce your monthly payments, however cost over the whole period will be greater”. She added:
“Not all lenders offer this length but if you use a mortgage adviser, they can help you search the market for the best deal. Although a longer term does mean that you will pay more in interest over the full term it does reduce your monthly outgoings. Once you come to the end of your deal you could opt to remortgage to a shorter term, so it doesn’t necessarily have to be forever. “
