What’s happening with mortgage rates?

A series of unfunded tax cuts announced by the new Chancellor of the Exchequer, Kwasi Kwarteng, forced the Bank of England to issue an emergency statement pledging to lift rates ‘as much as needed’ to control inflation, following major volatility caused to the pound and UK gilts.

The Bank of England has already raised the base rate seven times from 0.1% to 2.25% since De-cember, which has pushed up the cost of borrowing, because the swap rates banks use to price fixed-rate deals have also risen sharply. These swap rates jumped rapidly in the aftermath of the Chancellor’s Mini-Budget on 23 September, which sent government borrowing costs soaring.

As a result of the uncertainty over future interest rates, many lenders within days of the Mini-Budget pulled nearly a thousand mortgage deals from the market. First-time buyers and those looking to remortgage are likely to be most affected.

Subsequently, there have been reports of some property sales falling through as lenders backed out of previously agreed mortgage deals due to market uncertainty.

The Halifax, part of Lloyds Banking Group, put up the interest rates on a range of deals for new bor-rowers to well over 5%. ‘The new rates reflect the continued increase in mortgage market pricing over recent weeks,’ a spokesperson for Halifax said.

According to Moneyfacts, the interest rate on a typical two-year fixed rate mortgage has now breached 6% for the first time in 14 years. An average of at least 100,000 people a month are coming to the end of their current mortgage and face a significant rise in their monthly repayments.

The interest rate on a new, average two-year fixed deal on the morning of the Mini-Budget fiscal event was 4.74%, compared with 6.07% on 5 October. The result of this, for somebody borrowing £200,000 on a 30-year mortgage, is in the region of an additional £170 a month on repayments. A five-year fixed deal has typically risen from 4.75% to 5.97% over the same period.

Following the Mini-Budget, mortgage rates subsequently jumped with the expectation of a faster and higher increase in the bank rate in the coming months. Other major lenders such as NatWest, Na-tionwide and Virgin Money have also increased their rates.

Moneyfacts highlighted a scenario whereby a homeowner borrowing £200,000 on a 30-year mort-gage may have been looking at a rate of 3.5% and a monthly repayment of £898 during mid-September. But at the time of writing this article on 5 October, this is more likely to have risen to a 5.5% rate and a monthly repayment of £1,135.

On the morning of the Mini-Budget there were 3,961 deals available, compared with 2,262 at the start of October, a 43% fall, according to Moneyfacts.

We do not know what will happen to the market next. If the Bank of England leaves interest rates unchanged then lenders will have more certainty and more mortgage products will return, but if the pound falls again there is a greater chance of a Bank of England reaction, and affordability is likely to decline further.

However, economic clarity provided by clear forecasts from the Office for Budget Responsibility should eventually feed through to stop the increases, or see some reversal in mortgage rates. Dur-ing her speech at the Conservative Party conference on Wednesday 5 October, Prime Minister Liz Truss said that the government ‘will do what we can’ to support homeowners. However, she said that the benchmark interest rate was set independently by the Bank of England.

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