Mortgage lenders have been gradually increasing prices in response to rising swap rates which have been driven upwards by events in the Middle East.
But this week Virgin Money announced the biggest price rise yet – with an increase of 0.7%. Santander also revealed it was increasing rates by up to 0.53%.
Then HSBC and Santander revealed they were reducing maximum mortgage loan sizes to stay within the regulatory rules.
It means borrowers who would have previously benefited from loosened affordability testing will see things tighten up. Instead of being offered loans which are 5.5 or six times their salary, they will be limited to borrowing at around 4.5 times their salary, which is the industry standard.
Aaron Strutt, product and communications director at Trinity Financial, said: “A 5.5 or six times salary income multiple is probably ok when rates are below 4% but when they get closer to 5% it is easier to see how borrowers could struggle.
“So far despite fixed rates getting much more expensive, mortgage acceptance criteria has generally stayed the same but as the financial fall out of the war continues lenders are having to respond.”
How much have mortgage prices increased in March?
Both the rate hikes and affordability changes will come as a blow to borrowers who are looking for a mortgage deal – either to buy a home or remortgage.
In the beginning of March, just before the conflict began, the Moneyfacts Average Mortgage Rate was at 4.89%. Lenders had been making cuts to prices and the markets were forecasting another interest rate reduction was on the cards.
But following the rise in oil prices, swap rates, which lenders use to set their pricing, have soared and this has meant fixed rate mortgages have been increasing in price.
It means the Moneyfacts Average hit the 5.50% benchmark at 4.30pm on Wednesday 25 March.
The last time it was this high, or higher, was in August 2024. At that time the Base Rate was 125 bps higher at 5.00%, but inflation was at 2.2% and market consensus was that interest rates were trending downwards.
Adam French, head of consumer finance at Moneyfactscompare.co.uk, said it marked another ‘unwelcome milestone’ for borrowers this month.
“These rising costs are in direct response to the conflict in the Middle East which has dramatically shifted market expectations around inflation and future interest rates, with lenders scrambling to keep up with rising funding costs.
“Moneyfacts’ analysis of more than 30 years of historic rates data shows mortgage rates have historically averaged around 1.5-1.75 percentage points above Base Rate. If a couple of rate rises materialise as markets are currently predicting, this could see the overall average mortgage rate stabilise at around 5.75%-6.00%.
“This would leave borrowers paying £1,500 to £2,000 more per year on a typical mortgage compared to just a few weeks ago. However, given the volatility of events this is subject to change in either direction.”
What’s the advice to mortgage borrowers?
Borrowers who are locked into a fixed rate will be safe from any further rises until their deal expires. For anyone else about to apply for a mortgage or who is in the process – the guidance of your mortgage broker is now crucial.
Dariusz Karpowicz, director at Doncaster-based Albion Financial Advice, speaking to the Newspage agency, said: “When nobody wants to be the cheapest on the best buy tables, you know the mood has shifted from caution to outright fear. The real question is whether this is 2008 again or just a brutal correction.
“Either way, products are vanishing daily, rates are climbing by the hour, and borrowers who hesitate are paying for it. If you are mid-application, lock your rate today. Tomorrow’s pricing is anyone’s guess.”