When rates rose again to 0.50% in February 2022, it confirmed that the period of cheap borrowing was almost certainly over.
However, despite two base rate hikes in three months, rates continue to remain low by historical standards, with mortgages cheap and competition among lenders still tight. Nevertheless, further rate rises are indeed expected and many households are starting to worry about what this means for their finances. Add to this rising inflation, soaring energy costs and the significant increase in the cost of living, and it’s fair to say that a lot of people are already starting to feel the squeeze.
One of the most significant impacts of interest rate rises is that it is going to make borrowing more expensive and will ultimately lead to higher mortgage costs. While the effect of this may not be immediate for some, those on variable rate deals will have already seen an immediate increase in line with the Bank of England’s changes. Similarly, the upward direction of two-, five- and 10-year swap rates confirms the cost of mortgages is on the rise, for example since the start of the year, 5-year swap rates were around 0.50% and now they are just over 1.60%.
For those on a fixed rate, the increase will come when the current term ends and may be significantly higher than the expiring deal, while new borrowers or those remortgaging are already seeing the rate hikes passed on by many lenders and should opt for a fixed rate deal to lock in a lower rate for the next few years.
With the Bank of England expecting the rate of inflation to hit 7% by spring, it is almost inevitable that further base rate rises are on the cards as the bank tries to keep inflation in check and control the escalation of everyday costs. This is likely to place even greater pressure on household budgets and possibly deter some first-time buyers from taking that initial step onto the property ladder.
Although concerns around affordability measures are warranted, any increase in mortgage rates is likely to be slow and controlled, meaning the cost of borrowing will continue to remain relatively cheap by historical standards for some time. So even though mortgages are becoming more expensive, they are starting from a very low base, which means they may still be affordable for many.
Similarly, all current borrowers will have undergone a 3% mortgage stress test (this is the percentage above the rate at which fixed or capped rate loans will revert) when applying for their loan, so affordability pressures at a significantly higher rate will have already been accounted for.
Borrowers already feeling the strain or those concerned about the rising cost of living should act sooner rather than later to try to ensure they get the best deal possible when taking out their next loan. For those coming to the end of their term or first-time buyers still hoping to get a foot on the ladder, speaking to a broker will offer the advice and guidance needed to navigate the mortgage market. Brokers have access to a wide range of deals and products from a variety of lenders and can ensure borrowers get the best possible deal at a price they can afford.
