Homeowners on edge as inflation and interest rates rise: What is next for UK mortgage rates?
Many people up and down the country will be feeling the financial strain of the cost-of-living crisis, and this’ll only add more pressure on the monthly budgets of millions of UK mortgage homeowners and of those currently looking to buy.
With the Bank of England’s base rates having risen to 1.25 per cent in June and further rises suspected in August, many will be feeling uneasy about the financial uncertainty in the UK right now, especially if they’re also having to keep up with the costs of owning a home or are looking to buy.
To understand the stress that homeowners or prospective buyers in particular might be feeling, and to unpicked what rising mortgage rates might mean for them, as well as mortgage rate forecasts and predictions, City PM spoke to the team at Online Mortgage Advisor to analyse the current state of the market.
Rising interest rates
The Bank of England last raised interest rates to 1.25 per cent on 16 June – which was the fifth rise since December 2021, when interest rates stood at just 0.1 per cent.
Although the first few rises had relatively little impact on low-deposit mortgages, the third and fourth increases both resulted in rates on 90 per cent and 95 per cent mortgages increasing.
On top of this, the Bank of England is likely to increase interest rates again in the continuing battle against inflation, which currently shows little sign of easing, with inflation now sitting at 9.4 per cent.
The next interest rate decision will be on 4 August, so if you’re still thinking about locking into a mortgage agreement, sooner might prove to be better than later.
The firm told City PM it suspects mortgage rates will continue to climb over the coming months, and those looking to buy should be mindful that they’ll be facing rising asking prices also, with the average price of property coming to the market hitting its sixth consecutive record this month – increasing by 0.4 per cent, as well as monthly mortgage repayments which are now 20 per cent higher than the start of the year, according to Rightmove’s latest house price index.
Fighting inflation
The Bank of England recently increased interest rates to 1.25 per cent to help curb inflation, making it more expensive to borrow money and incentivising people to save as a result.
The hope is that more people will be careful about spending money, which will in turn reduce the demand for goods and services and subsequently reduce their prices.
This, coupled with Russia’s invasion of Ukraine jeopardising energy and food supplies has caused prices across the board to rise.
Fixed-rate mortgages
Typically, existing fixed-rate mortgages won’t feel the effects of any base rate changes until they’re shifted to the lender’s standard variable rate (SVR).
However, fixed mortgage rates are creeping up for new applicants and those remortgaging, meaning many people are struggling to find good deals unless they can fix their rates.
That being said, it appears that the number of fixed-rate offers available have dwindled recently, and some lenders are now offering virtually the same rate for two-year and five-year fixed mortgages.
With the prospect of further interest rate rises looking likely, we suspect this’ll drive many people to lock in longer fixed-term mortgage rates for more certainty anyway.
Next five years
When thinking about mortgage predictions for the next five years, it seems as though the continued high demand will remain resilient for the rest of 2022 at least.
Although it might soften slightly, with there being such an imbalance between supply and demand, we can’t see any significant price falls in the second half of the year, perhaps just seasonal, month-on-month falls.
However, we suspect that inflation may start to slow in the coming years. This means that borrowers could face more expensive repayments if they renew their loans, but the homeowners struggling to pay their monthly mortgage repayments may start to feel some financial relief.
Also, it’s expected that affordability checks with some banks could ease, making it easier for more people to qualify for a mortgage.
As well as this, another trend we envisage taking off is an increase in the number of people opting for green mortgages, with climate change becoming an ever-growing concern, and because more favourable terms usually come with buying and owning an energy efficient home.