Average 2 year fixed rate mortgages are 2% higher than at the start of the year

Journalist: Frances Ivens, This is Money

ended 03. August 2022

A journalist at the Mail Online / Thisismoney is writing a quick piece on the rise in average two year fixed mortgage rates (up 2% since the start of the year) - and is looking for some comment on how this will impact the market as a whole and how are lenders responding? 

With the Bank of England expected to raise the base rate tomorrow is the industry bracing for the impact? What happens if people cannot afford to remortgage at the higher rates? Deadline is ASAP!

12 responses from the Newspage community

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Rates have dramatically increased since last year, from rates below 1% to above 3%, a level not seen for a number of years. Clearly this will cause issues for those who are remortgaging as most did not expect their interest rate to increase by this amount. Now, lenders are increasing rates and pulling existing products a lot quicker. Where they used to give us at least a day's notice, this is now reduced to a few hours in some cases. For example, one lender emailed yesterday at 4.30pm stating that they were changing their existing rates by the end of the day. This makes it very challenging to secure a mortgage, so I would advise people to move as quickly as possible.
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Most people will be able to remortgage in one form or another. Yes the base rate is rising, but what we don't know is whether mortgage rates are rising because of a reflection of market predctions or whether it's being used as a tool to manage work flow. When lenders get too busy, they typically try to 'price themselves out' of the market, which usually slows the amount of enquiries they get. Currently most lenders are a swamped with applications so are struggling to keep up. The issue with this arises when everyone is busy so they all try to do the same thing. Needless to say, mortgage rates are a tad erratic at the moment. The average 2-year fixed has gone up approximately 2% since the start of the year, but the base rate has only risen by 1%. It's clearly not a direct correlation. Hopefully, when the pace of the house market slows and volume of mortgage applications settles this will even out somewhat. At the end of your current fixed rate deal, you will either be able to remortgage to another lender (if your affordability still fits) or you can take a product transfer with your existing lender. This is a pretty straightforward process and is mostly done online. A good broker will be able to help with either option. What we dont need is a population of Mortgage borrowers who bury their heads in the sand and just sit on their lenders Standard Variable Rate. This will end up costing money needlessly. So to 'trim the fat' where possible start the process a good six months BEFORE the end of your current fixed rate.
What isn't clear is how much of these bumper rate rises are being driven by the cost of funding the borrowing or the market being so busy and lenders under so much pressure. No one really wants to be coming up cheapest in case they are inundated by everyone wanting to remortgage and secure a new mortgage deal at the moment. A cautionary tale would be the normally very good and competitively priced Nationwide who are currently taking nine working days just to check a payslip or a valuation report. That's pretty widespread at the moment because lenders are simply struggling to keep up with the pace and the only way they can turn off the taps is to change rates. On the flip side, some lenders when they have been on top of paperwork have actually announced rate cuts so it swings both ways.
Unless people have taken out significant unsecured borrowing, they will be able to remortgage; this is due to the Bank of England ensuring that a stress test meant borrowers could afford the mortgage at the SVR rate +3%. Unfortunately, the Bank of England has removed that stress test, so whilst borrowers exiting two-year deals in the next six months should find themselves in a position to be able to remortgage, new borrowers won’t have to pass that stress test. Therefore there shouldn’t be a problem with affordability checks. Moreover, if they can’t remortgage to another lender, then get a product transfer onto a rate with the same lender. This may seem harsh, but countless other brokers and I have warned for the last five years that when rates rise, if you borrow the maximum, you could find yourself stretched beyond belief. Sadly we might as well have been talking to a brick wall. Many borrowers only hear what they want to hear rather than listen to the expertise of mortgage professionals.
Rate shock is the industry term for when someone comes off a low fixed rate into a higher interest rate market; just like we are seeing now. Given that rates have been at record breaking lows, which was widely reported in the media, and given that the subsequent increases in rates have also been widely reported, it shouldn’t really come as a surprise to anyone when they see that the best new rates are now higher than their deal that is ending. However, whilst lenders will have factored in rising rates when they originally assessed the client's application, those assessments would not have accounted for higher interest rates, higher taxes, higher fuel costs, higher energy costs and higher food costs all happening at the same time. So, whilst the increase in rates should be no surprise, the overall impact that has on household budgets could be, given all the other increases people are having to absorb. The one saving grace currently is that employment is strong, but if we tip into recession and we see firms laying off staff, which could trigger a wave of mortgage and other credit defaults as people see a sharp decrease in their household income and can no longer meet all these increased bills. One thing people could consider, in discussion with a professional mortgage adviser, is looking at extending their overall mortgage term to reduce their repayments, or in some situations maybe move some or all of the mortgage into an interest only basis. There are options to help, but seek advice on which could work best for your own personal situation.
We have seen significant increases in mortgage rates and we should be braced for more as the Bank of England tries to manage inflation. Rather than looking at the cheapest initial rate, more borrowers are now looking at longer term fixed schemes to obtain that much needed stability. Rising rates, together with the cost of living crisis, puts a real strain on people's finances and the short to medium term future looks tough for many.
With interest rates possibly doubling between now and the end of the year, higher housing costs will be the final nail in the coffin for many homeowners' finances. Unable to afford the new rates when they come to remortgage, many could be forced to sell their properties. Then there are first-time buyers. Without access to ultra-cheap credit, they simply won't be able to pay ludicrous asking prices anymore. In this environment, property prices are likely to fall, possibly by as much as 10% over the next 12 months.
A two year fixed rate is rarely the right product for a homeowner, instead the five year fixed rate should be their starting point. This sometimes controversial statement comes from my belief that two year deals often suit the broker and the lender more than the client. If a client has no plans to move or change their mortgage significantly in the first five years, then why not fix for this term? The rates are often lower and ensure the client has certainty of payment for five years. They also save on broker, lender and valuation fees by not having to pay them every two years.
A borrower will only not be able to afford to remortgage if either their income has reduced, or their expenditure has increased significantly. And if this is the case, and there are no viable remortgage options available, they can always simply switch products with their current mortgage lender. A product switch does not involve scrutiny of the applicant's affordability. It might not be the cheapest mortgage deal on the market, but it will likely be one heck of a lot cheaper than the standard variable rate they would otherwise drop onto.
At present, the rates we are seeing are still below those that have been used to stress test mortgage affordability. So, in theory, whilst it will cost borrowers more who are looking at remortgaging, it should still be affordable. However, people's circumstances do not remain static and changing working roles, car finance, personal loans and other commitments may well mean that for some the new mortgage costs will be a challenge. For those people they need to be ahead of the situation and either speak with their lender or an independent mortgage adviser to understand their options.
"The Bank of England expected bank base rate increase tomorrow will affect a few immediately but will affect us all as our initial rates end." "If you took a mortgage after 2015, the Affordability Tests were done at that time priced in such increases, and your mortgage should remain affordable. Except the increase in energy prices and inflation were not priced in, so now is the time to review our spending habits and cut frivolous spending." "If your initial term on your mortgage is due to expire in the next six months. Today is the day to contact your mortgage advisers to secure today's mortgage rates, later mortgage lenders will factor in this expected bank base rate increase."
It wasn’t so long ago that we all gasped at sub 1% five year fixed rates, yet now you would do well to get a two year fixed rate at 3%. The turnaround has been significant and rapid, and the impact on households magnified by the well documented rising costs across the board, the question is how much more can the average person take?! Right now, demand remains high and the market busy, partly driven by the millions coming to the end of their 2- and 5-year fixed rates deal in 2022, with August being a peak month for mortgage deals expiring. It’s partly this surge in remortgage activity coupled with rising costs of borrowing that’s resulting in lenders constantly raising their rates, not wanting to be the cheapest on the market as they grapple with serving the volumes they're getting.