As the cost of living crisis endures and inflation rates are high — at a shocking nine per cent in April — there is an unsettling sense that more interest rate hikes next year are probable which will further stretch the monthly budgets of millions of UK homeowners with mortgages.
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UK homeowners experience immense stress levels regarding their mortgage rates. To try and help those people, we are investigating the current state of affairs with mortgage rates and making predictions for the coming years. This article will help you make informed loan decisions that positively will impact your family’s financial stability.
What’s Going On With UK Interest Rates?
The Bank of England increased interest rates to 1.25 per cent on June 16, 2022, making this the fifth increase since December 2021 — when bank rates were just 0.1 per cent — resulting in a £312 yearly rise in the cost of a £200,000 mortgage (2.50% variable rate).
Existing Bank rate-linked mortgages, such as base rate trackers, follow interest rate increases. The cost of many new fixed-rate mortgages have already factored in any future rate rises.
As per Halifax’s recent house price report, mortgage rates are rising, and so are asking prices for anyone looking to buy or move houses. Compared to last year, asking prices have increased by 10.5%.
While this is still terrible news, it’s worth noting that annual house price growth was at its lowest level in 2022.
The Consumer Prices Index (CPI) – a measure of inflation unfortunately rose by over nine per cent in the 12 months leading up to May 2022 – the highest it has been in 40 years.
Longer-Term Fixed-Rate Mortgages
Mortgage brokers have remarked on customers opting for longer-term fixed-rate loans to secure their property finances.
Yes, borrowers used to pay more to fix their rate for longer, but the price gap is decreasing so fixed-rate mortgages are worth considering. Long-term mortgage contracts are extremely competitive right now – with as low as 0.45% difference between a two-year fix and a ten-year fix.
As we previously stated, with interest rates expected to rise soon, it may be advantageous for purchasers to consider the long-term when selecting their mortgage agreements.
Predictions for Mortgage Rates in the Next Five Years
Without a doubt, interest rates are on the rise. This inevitably means that mortgage rates will increase as well.
The average rate on a five-year fixed mortgage is expected to climb by 0.3% by the end of this year, and then rise further to just over one per cent next year, before reaching nearly two per cent in 2024.
According to the Financial Conduct Authority (FCA), the average base rate will be three per cent, with a variation between two and a half to four per cent. As expected, this means that borrowing money will become more expensive as banks transfer their costs onto customers.
If inflation stays low in the future, borrowers may have to pay far more if they renew their loans. However, homeowners struggling to pay off their mortgages might be relieved. One forecast suggests that lenders may provide lower interest rates on new deals, allowing borrowers to borrow large sums than previously possible.
Borrowers Will be More Likely to Fix for a Longer Period
In 2021, more borrowers took out mortgages with terms of more than 25 years. And although this raises interest rates, homeowners will see that their monthly payments are much lower. Back in March, Habito debuted a 40-year fixed-term plan with no exit fees.
If interest rates continue to increase, borrowers would be more inclined to choose longer fixed-term plans, according to the industry trend.
For How Long Should You Fix Your Mortgage?
If the size of your mortgage as a percentage of your property value (loan-to-value) is low, you will almost certainly reap the benefits of fixing, as interest rates will be lower.
Now, of course, the longer your fixed term is, the more likely you are to be locked into a lower interest rate. If you choose a longer fixed term and want to repay or relocate your loan, there will almost certainly be exit penalties and early repayment costs if you do so.
Remember to factor in the cost of leaving your current mortgage agreement when considering a remortgage, which will add to the overall cost. A fixed-term mortgage offers stability and peace of mind but may come at a higher price.
Long-term fixed-rate mortgage deals are a new development in the housing market, with some providers offering up to a 40-year fixed deal.
If you want helpful tips on improving your credit score to secure a good mortgage deal, read our article: How To Improve My Credit Score Fast
