Here’s everything you need to know about rising mortgage rates and whether they will fall in the future.
Why are mortgages going up?
Rising interest rates mean it costs more to borrow money from banks and other lenders, while people who save money in banks receive more interest for putting their money into accounts.
The Bank of England says it is increasing interest rates to bring inflation down but it takes time to work, usually up to two years.
The idea is that higher interest rates mean less money is being spent in the UK and that brings down the overall spending in the economy and slows price rises down.
As mortgages are a type of credit, they are affected by rising interest rates.
However, not all mortgages are affected. People who have a fixed-rate mortgage will be largely insulated from interest rate rises until the fixed rate comes to an end and a new one needs to be negotiated.
People on tracker mortgages are more susceptible to interest rate rises because they follow the base rates set by the Bank of England.
Many mortgage lenders already put up fixed-rate mortgages for new customers ahead of the interest rate, according to Rightmove’s mortgage expert Matt Smith.
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The property expert said the average interest rate for a five-year fixed 85% mortgage rose from 4.44% to 4.52% ahead of the BoE announcement. That works out at an extra £14 a month for someone purchasing a typical property and spreading the cost over 25 years.
Smith said people on tracker mortgages may be hit harder by the BoE’s decision to raise interest rates.
The Rightmove expert said: “Those on a tracker mortgage will be more disappointed with the news, as they may have thought that the base rate had peaked in March given some of the positive signs for the wider economy, and this is another cost they will need to factor into their monthly budget when the full rate rise is passed on.”
The rise in interest rates has seen the housing market slow down with the number of transactions and mortgage approvals declining in April 2023.
There were 82,120 property transactions in the UK in April, according to HMRC’s seasonally adjusted figures. That represented an 8% drop compared to March while also a quarter down on April 2022.
Mortgage approvals also plunged. There were 48,690 mortgages given the greenlight in the UK in April 2023 according to the Bank of England’s statistics. That figure is 5% lower than in March and more than a quarter lower than a year ago and levels seen between 2018 and 2019.
How high will mortgage rates go in the UK?
It’s impossible to say how high interest rates may go without the aid of a crystal ball but the Bank of England has given some indication of how it expects things to progress in the future.
The central bank has targeted getting inflation down to 2% by the end of 2024 – it is currently at a “higher than expected” 8.7%.
BoE forecasts predict that interest rates will peak at 4.75% at the end of 2023 before falling to around 3.5% by 2025.
But while inflation remains high, there is the possibility of interest rates rising to counteract it and that could mean a 13th consecutive monthly rise might be on the cards in June.
In fact, stubborn inflation rates mean rises could continue for a while yet.
Are mortgage rates coming down in 2023?
With interest rates set to remain high until inflation starts to fall, that could see mortgage rates continue on an upward trajectory.
Rightmove’s Smith said: “Looking ahead, if the Bank of England outlines a positive view on the prospect for inflation and base rates, we could see mortgage rates fall, as they have done after recent base rate decisions. But if the bank is more cautious, we can expect rates to continue their upward trend in the short term.”
However, the bad news for people paying off mortgages is that a lot of the pain could still be to come.
Think tank Resolution Foundation said two-thirds of the eventual £12 billion increase in annual mortgage costs across Britain may still yet to be passed on.
That’s because fixed-rate mortgages have become more popular in recent years – the think tank said fixed-rate deals accounted for £4 out of every £10 spent before the financial crisis but now £9 out of every £10 lent is at a fixed rate.
Mortgages that are at a fixed rate for five years also became the most popular product between 2016 and 2022, overtaking two-year fixed mortgages.
In fact, inflation figures in April suggested rising interest rates will continue. Inflation in the year up to April was 8.7% and although that was down from the 10.1% recorded in March it was still higher than expected. Financial analysts had reportedly anticipated inflation to fall to 8.2%.
That led to predictions the Bank of England could raise rates to as high as 5.5% in a bid to control inflation.
Kellie Steed, Uswitch’s mortgages expert, said: “While many experts thought that the series of consecutive Bank of England base rate rises were ending, more recent analysis suggests that it will reach 5.5% by the end of the year, with no signs of rates beginning to fall until at least February 2024.
“It’s clear that both recent and anticipated future base rate lifts, as well as increased swap rates, have already been factored into many lender’s rate decisions, with Nationwide, Halifax, Santander, Virgin Money and Atom mortgages all pushing up their fixed rates over the past few days.”
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What support is available if you’re struggling to pay your mortgage?
Rising mortgage payments may not be something that every household can absorb, particularly with the wider cost of living crisis driving up other costs.
If you are struggling to pay your mortgage, the first thing you should do is contact your lender to discuss your options.
If you are receiving universal credit or other benefits, you may be able to get a Support for Mortgage Interest Loan to help you cover rising interest payments. This is from the Department for Work and Pensions (DWP) and you have to repay the loan when you sell the property.
Additional support is available in Scotland through the Home Owners’ Support Fund. This is based on two schemes – the Mortgage to Shared Equity scheme will see the Scottish Government buy a stake in a property to reduce the loan while the Mortgage to Rent scheme allows a social landlord to buy a property and rent it back.
Around one in seven mortgage holders who seek help from StepChange are in arrears on their mortgage, the debt charity said.
“The situation is becoming increasingly precarious for many people and widespread problem debt is a risk, particularly for financially vulnerable households,” said Vikki Brownridge, chief executive of StepChange in a call for firms to be “proactive” in supporting people who are struggling to pay.
“For anyone worried about housing costs and their ability to cover payments, it’s important to reach out for help as early as possible, whether that’s through contacting their lender, or a free debt advice charity like StepChange.”
If you are struggling to pay, support from StepChange and other debt charities is available or you can call the National Debtline on 0808 808 4000 or contact Citizens Advice for advice.
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Source: bigissue.com