Two-year fixed mortgage rates in the UK have risen to the highest level since the 2008 financial crisis, adding to the pressure on homeowners.
A typical two-year deal has risen to 6.66%, up from 6.63% on Monday, according to the data provider Moneyfacts.
It is the highest rate since 2008 – bad news for homeowners whose deals are coming to an end and who need to remortgage soon. It means they will be paying hundreds of pounds more each month.
The rise takes the cost of two-year mortgages slightly above the peak of 6.65% reached last autumn, when the borrowing market was rocked by Kwasi Kwarteng’s disastrous mini-budget package of unfunded tax cuts.
The average five-year fixed mortgage rate rose to 6.17% on Tuesday, the highest since last October, from 6.13% on Monday.
Fixed-rate mortgages are priced off the yield, or interest rate, on UK government bonds. They hit their highest levels since the financial crisis last week as investors anticipated further increases in borrowing costs to fight inflation.
The Bank of England unexpectedly raised its base rate by a half point to 5% at its June meeting as it battles high inflation. Financial markets have pencilled in a 70% chance of another half-point rise to 5.5% at the August meeting. Interest rates are expected to reach 6% by November and at least 6.25% by next spring.
Hundreds of mortgage deals have been pulled from the market again as lenders rush to reprice products. Moneyfacts said there were fewer deals available – a total of 4,344 residential mortgage products, down from 4,631 on Monday.
Savings rates have not risen as quickly as mortgage rates. The average rate on an easy access savings account was unchanged on Tuesday at 2.53%.
Borrowers are paying the price for not fixing their mortgages for longer; for example, for the full term of the loan, which is more common in other countries such as Germany. There are few 25-year mortgages on the market, including Kensington’s starting at 5.6%.
The City regulator urged the UK’s largest high street banks to “accelerate” savings rates after a meeting with chief executives last Thursday. They admitted they needed to do more to support consumers after claims they were “profiteering” from high borrowing rates.
High street banks and other mortgage lenders were questioned about the mortgage situation by MPs on the Treasury committee on Tuesday morning. Executives from Lloyds Banking Group, Santander UK, Skipton Building Society, Nationwide and Paragon Banking Group faced questions over what they are doing to help struggling households.
Charlotte Harrison, of Skipton Building Society, said the lender had stress-tested customers against a higher interest rate environment.
“What I expect to see over the next six months is that we will see more customers with financial stress. But I expect that to be relative to the market. And I think there are options available to those customers as well,” she said.
The International Monetary Fund warned on Tuesday that interest rates may need to rise further – and stay high for longer – in order for the Bank of England to win its battle against inflation.
In its annual health check on the UK economy, the Washington-based IMF supported the decision by Threadneedle Street’s monetary policy committee to increase official borrowing costs by 0.5 percentage points to 5% last month.
“Should inflationary pressures show signs of further persistence, the policy rate may have to be raised further and would need to remain higher for longer to durably lower inflation and keep inflation expectations anchored,” the IMF said.
