Nearly two and a half million mortgage deals have ended in the past two years, with higher rates adding £7.26bn to the nation’s housing costs – but analysis from a leading estate agent shows the worst of the added pressure is behind us.
Between 2021 and last summer, the Bank of England increased interest rates from a record low of 0.1 per cent to a 16-year high of 5.25 per cent, leading mortgage rates soaring and adding to household’s monthly bills.
Back in December 2021, the average two-year mortgage fix was as low as 2.34 per cent, but by last summer, they had reached 6.86 per cent. Analysis from Savills shows that in the past year alone, those coming off fixed-rate mortgages saw their annual costs rise by an average of £3,590.
Those coming off two-year fixes, which at one point during 2021 were available for below 1 per cent, saw their bills rise by £4,881 on average, squeezing household finances.
But Savills’ projections now show that fewer mortgage deals are set to end in the next 12 months, and that falling mortgage rates will mean those who do have to sign new fixes will see less dramatic rises in their costs.
Savills expects 994,000 fixed-rate mortgages to come to an end in the year to June 2025 – a 21 per cent reduction on the previous 12 months.
The additional costs that these people will face will range from an extra £1,855 per year to an extra £2,137, depending how the path of interest rates pans out, with an assumption of average new rates tapering to 3.9 per cent by June 2025 in the best case scenario.
“Though there are still quite a lot of mortgage holders who are yet to feel the pinch, with fewer low-interest-rate mortgages coming to an end and the prospect of headline mortgage rates easing back, our analysis suggests the worst of the cost increases are at least behind us,” said Lucian Cook, director of residential research at Savills.
“In turn, that should allow a steady, if not electrifying, recovery in the housing market,” he added.
He said the number of people on long-term fixed mortgages – where mortgage costs are locked in for a set period of time – had played a part in shielding the housing market, so that not everyone was hit at once.
But he added that this created a long tail to the effects of interest rate rises.
“The flip side is that it takes quite a long time for those interest rate rises to work their way through the system,” he said.
“That means housing costs continue to grow sometime after rates have stopped rising, progressively taking spending out of other parts of the economy, and that makes it more difficult for the Bank of England to balance inflation goals with protecting the economy,” he explained.
Most Britons are on fixed-mortgages
Most households in the country are now on fixed-rate mortgages, which tend to offer better rates than other types, and also shield customers from fluctuations in interest rates from the Bank of England.
Those on variable and tracker mortgages see immediate changes to their monthly payments when the Bank of England ups or cuts rates – which can happen every six weeks – but those on fixed deals only see changes when their term ends, which is usually only every two, five or ten years.
Fixed rates have become Britons’ most popular mortgage option over time. In April this year, 96 per cent of all new mortgage deals signed were fixed contracts, according to the industry body UK Finance.
Ten years ago, the figure stood at around 88 per cent, and pre-financial crash, it was even lower.
Back in April 2005 for example, just 52 per cent of mortgages being agreed were on fixed rates, with 48 per cent being variable.
This means that even though mortgage rates are set to go down from their current level, many people who are coming off mortgages over the next year will see their costs still go up.
This is because they are coming off deals signed potentially five years or more ago before rates started to rise.
Mortgage rates expected to continue to tumble
Mortgage rates have fallen in recent months on the expectation that interest rates would fall in the near future.
Since last Thursday, when the Bank of England cut interest rates from 5.25 per cent to 5 per cent, mortgage rates have fallen even further.
The lowest rates available on the market are below 4 per cent, although these are generally only an option for those with very high deposits or equity.
Interest rates are expected to fall further over the coming months, which mortgage brokers say will feed into even lower rates.
Financial markets expect the Bank of England base rate to be around 3.75 per cent by the start of 2025, but some forecasters predict even more dramatic falls.
Capital Economics for example, thinks that interest rates will each 3 per cent by the start of 2025.
Either way, brokers say mortgage rates will go down.
“It’s evident that mortgage rates are on a downward trend,” said Nick Mendes of John Charcol brokers.
“For those with a low Loan-to-Value (LTV) ratio of around 60 per cent, the outlook is particularly promising, with rates potentially dropping to as low as 3.5 per cent by the first quarter of next year. Borrowers with a higher LTV of about 80 per cent might face slightly higher rates, around the 4 per cent mark,” he added.
Barclays launched a new mortgage this week offering a five-year fixed mortgage at 3.84 per cent for those buying a new home – but only if they have a deposit of 40 per cent or more.
Despite this, Mendes cautioned against people holding off fixing in the hope of lower rates.
“While it may be tempting to delay in the hope that mortgage rates will continue to fall, it’s important to stress that nothing is guaranteed. If anything unsettles the market, we could see a delay or pause in the current downward trend. For this reason, securing a rate early is advisable,” he explained.