Lenders are increasing their mortgage rates, in the latest blow for people buying a home and homeowners due to remortgage.
The rate rises come amid concerns that the Bank of England may take longer than previously predicted to cut its base rate, which impacts the cost of borrowing for banks and building socieites.
Read on to find out whether the latest increases should be cause for concern, and our impartial advice on finding the right mortgage.
What’s happening to mortgage rates?
Mortgage rates have been high since the government’s mini-Budget back in September 2022.
They peaked last August, when average rates hit 6.85% for a two-year fixed-rate mortgage and 6.4% for a five-year fix. These were the highest figures recorded since 2008.
In the months that followed, mortgage lenders cut their prices, resulting in rates dropping to 5.6% and 5.2% respectively by February this year.
However, this trend has now reversed, with a procession of banks and building societies increasing their rates over the past two weeks.
The chart below shows how average rates have changed in the last month.
Why are mortgage rates rising?
The Bank of England’s base rate heavily influences the cost of mortgages.
At the start of this year, it was anticipated that the Bank would cut the rate (currently 5.25%) significantly over the course of 2024.
This optimism resulted in many lenders reducing their prices slightly in the first quarter of this year.
However, amid stubbornly high inflation, the Bank has held the base rate at 5.25%.
- Find out more: Bank of England base rate and your mortgage
When is the next base rate announcement?
The Bank’s next announcement is on 9 May, and it is widely expected that the base rate will again remain unchanged.
This likelihood has contributed to an increase in financial market ‘swap’ rates over the past couple of weeks.
These rates influence the cost of borrowing for lenders and, therefore, the prices they charge borrowers applying for mortgages.
- Find out more: best mortgage rates for May 2024
Should borrowers be worried about rate rises?
Lenders including Barclays, HSBC and NatWest increased their rates last week, and Nationwide and Santander followed suit this week.
With prices already so high, these changes are a blow for home buyers and people remortgaging.
However, it’s important not to get too carried away. Average rates have risen by around 0.1 percentage points (pp) in the past month, and these relatively small increases are unlikely to make or break mortgage applications for most people.
‘Lenders are adjusting to changes in swap rates’
Mortgage brokers believe that the current chopping and changing of mortgage rates could continue for a while.
David Hollingworth of L&C Mortgages says: ‘Swap rates that influence movement in fixed-rate mortgages have increased compared to last month, but now seem to be levelling out. Lenders are adjusting, and as each one alters its rate it impacts those sat behind it, creating a domino effect and leading to multiple rate changes.’
Nicholas Mendes of John Charcol says: ‘The lack of a base rate reduction will create uncertainty in which markets will speculate and revise their forecasts. As a result, we will likely see a period of continuous repricing from lenders as they adjust profitability against funding lines and market competition.’
- Find out more: how to apply for a mortgage
When will mortgage rates drop again?
The Bank of England tends to make changes to the base rate in increments of 0.25 or 0.5pp.
After next week’s announcement, there will be five base rate decisions remaining in 2024 (assuming the Bank doesn’t make any emergency changes, as in 2020).
With the Bank currently adopting a cautious tone, an optimistic forecast would be that the base rate may drop twice in the remainder of 2024. Two 0.25pp reductions would leave the rate at 4.75%.
This scenario would bring down mortgage rates, but not significantly. This means a small price cut may be the best that borrowers can hope for this year.
- Find out more: mortgage repayment calculator
‘The base rate could remain higher for longer’
We asked mortgage brokers to predict when the first base rate reduction will take place.
David Hollingworth told us: ‘It’s looking more likely that base rate will start its descent later than previously anticipated. That could see the first cut only taking effect in August, but of course, much will depend on how the rate of inflation continues to ease.’
Nicholas Mendes says: ‘If inflation continues to pose a challenge, we should expect the bank rate to remain higher for longer, which would result in a period of higher mortgage rates. But, given the current movement and overall landscape, I do expect to see a reduction in August and potentially one more by the end of the year.’
Advice on getting the right mortgage
- Shop around and take advice: average rates might seem high, but depending on how much deposit or equity you have, much cheaper deals may be available – see our guide on the best mortgage rates. You can also consider taking advice from a mortgage broker on your options.
- Think about the type of deal you want: five-year fixes are currently cheaper than two-year deals, meaning you could save on monthly repayments by fixing for longer. However, a two-year fix offers you the flexibility to switch deals in a couple of years if rates drop – see how to choose a mortgage term. Likewise, think about how long you want to borrow for. Many first-time buyers are now taking out deals lasting 30 years or longer.
- Don’t look exclusively at the headline rate: the ‘cheapest’ deals might not always be what they seem. Always look at the upfront fees on a mortgage, as some lenders charge as much as £2,000. In some cases, you may be able to take on a slightly higher rate in exchange for no upfront fee.
- Consider other lenders: when remortgaging, it can be tempting to stick with your current lender, but see what else is out there first. As a starting point, check our mortgage lender reviews for the lowdown on which lenders offer competitive rates and good customer service.
- Look into schemes and specialist deals: if you only have a small deposit, it’s worth considering specialist deals for first-time buyers. For example, we’ve seen banks offering higher lending multiples for first-time buyers, and the promise of mortgages for people with a £5,000 deposit. It’s also worth looking into guarantor mortgages.
Which? Limited is registered in England and Wales to 2 Marylebone Road, London NW1 4DF, company number 00677665 and is an Introducer Appointed Representative of the following: 1. Inspop.com Ltd for the introduction of non-investment motor, home, travel and pet insurance products (FRN 610689). Inspop.com Ltd is authorised and regulated by the Financial Conduct Authority (FCA) to provide advice and arrange non-investment motor, home, travel and pet insurance products (FRN310635) and is registered in England and Wales to Greyfriars House, Greyfriars Road, Cardiff, South Wales, CF10 3AL, company number 03857130. Confused.com is a trading name of Inspop.com Ltd. 2. LifeSearch Partners Limited (FRN 656479), for the introduction of Pure Protection Contracts, who are authorised and regulated by the FCA to provide advice and arrange Pure Protection Contracts. LifeSearch Partners Ltd is registered in England and Wales to 3000a Parkway, Whiteley, Hampshire, PO15 7FX, company number 03412386. 3.Optimise Media Limited (FRN 313408), for the introduction of HSBC Group, who are authorised and regulated by the Financial Conduct Authority to provide credit brokering activity. Optimise Media is registered in England and Wales to Exchange Street Buildings, 35-37 Exchange Street, Norwich, England, NR2 1DP and company number 04455319. We do not make, nor do we seek to make, any recommendations or personalised advice on financial products or services that are regulated by the FCA, as we’re not regulated or authorised by the FCA to advise you in this way. In some cases, however, we have included links to regulated brands or providers with whom we have a commercial relationship and, if you choose to, you can buy a product from our commercial partners. If you go ahead and buy a product using our link, we will receive a commission to help fund our not-for-profit mission and our campaigns work as a champion for the UK consumer. Please note that a link alone does not constitute an endorsement by Which?.