Brokers have warned that recent falls in mortgage rates could soon come to an abrupt halt, with expectations mounting that home loan costs may rise in the coming days.
In the past few weeks, lenders have engaged in fierce competition for borrowers, resulting in a steady decline in interest rates for new fixed mortgage deals. This intense competition has revitalised the UK housing market, leading to increased activity among both buyers and sellers. Many prospective homeowners have been encouraged by the more attractive mortgage terms, prompting them to enter the market or consider moving.
However, changes are already on the horizon. The Coventry Building Society has announced that it will raise its mortgage rates on Friday, signalling a potential shift in the lending landscape. This move could prompt other lenders to follow suit, leading to a broader increase in mortgage rates. As lenders reassess their strategies amid changing market conditions, borrowers may need to act quickly to secure favourable terms before rates rise.
With the housing market showing signs of activity, the prospect of increasing mortgage costs could significantly impact both buyer sentiment and market dynamics in the weeks ahead.
David Hollingworth, associate director at L&C Mortgages, stated, “The mortgage market has experienced a decline in rates over the past few months, but this trend may soon come to a sudden stop.”
How borrowers are affected
Approximately 1.6 million existing borrowers are set to see their relatively low fixed-rate deals expire this year. Many first-time buyers have been eager to secure their first mortgage, and they would benefit from the ongoing low mortgage rates.
The interest rate on a fixed mortgage remains unchanged until the deal ends, typically after two or five years, at which point a new deal must be selected.
For example, a borrower who took out a mortgage a year ago with a 40% deposit faced an average interest rate of 6.16% on a two-year fixed deal. By October of this year, that average rate had decreased to 4.84%, according to financial data provider Moneyfacts.
This drop can be attributed to increased competition among lenders, alongside the Bank of England’s decision to lower the benchmark interest rate for the first time in four years back in July.
In September, the UK property market experienced a notable rise in demand from buyers, sales activity, and new property listings, according to a recent report by the Royal Institution of Chartered Surveyors (RICS). This surge was largely driven by competition among lenders, who had been lowering mortgage rates in recent months, making home loans more accessible to buyers. However, housing experts are now cautioning that this trend may soon come to an end, with some lenders expected to increase mortgage rates in the near future, potentially as early as next week.
One major lender, Barclays, has already signalled an intention to raise interest rates on certain mortgage deals, while simultaneously cutting rates on others. This is in response to recent fluctuations in the so-called swap rates, which play a key role in determining the price of fixed-rate mortgage deals. Swap rates have been climbing over the past few days, creating uncertainty in the market.
David Hollingworth, associate director at L&C Mortgages, warned that this could be a turning point for mortgage rates. “This is a reminder that things can change quickly in the mortgage market,” Hollingworth said. “While there’s no need to panic, those who have been waiting for rates to drop even further may want to consider locking in a deal sooner rather than later. If rates continue to rise, waiting could mean missing out on the lower rates currently available.”
However, Hollingworth also noted that while the outlook is uncertain, there is still room for optimism. “If market expectations shift again, it’s still possible to review rates and secure a better deal later on,” he explained. For now, though, the advice for homebuyers and those looking to remortgage is to act with caution and stay informed about any potential changes in mortgage offers and interest rates.
Impact on renters
Mortgage customers and prospective homebuyers will be hoping that any increase in mortgage rates remains small and temporary. Recent rises in swap rates, which influence fixed mortgage pricing, have analysts speculating about potential causes. These may include possible announcements in the upcoming Budget, remarks from Bank of England officials about future interest rates, and broader international tensions.
Despite this uncertainty, many analysts still expect interest rates to trend downwards in the medium term. Aaron Strutt from Trinity Financial remarked, “There is a lot of concern about the upcoming Budget, but once it’s announced, we could see the money market stabilise again.”
However, first-time buyers may face more challenges if mortgage rates start rising again. In addition to higher borrowing costs, they might also deal with increasing house prices and rising rents. With fewer rental properties available, as some landlords consider selling due to potential tax changes or stricter regulations, tenants may face higher rental costs.
Tina Paillet, president of Rics, highlighted the ongoing imbalance between supply and demand in the rental market. While supporting tenant protections through the Renters’ Rights Bill, she warned that reforms should avoid pushing responsible landlords out of the market, which could further restrict rental housing supply.
Ways to make your mortgage more affordable
Consider making overpayments. If you’re currently on a low fixed-rate mortgage, increasing your payments now can help reduce the overall balance of your loan. By doing so, you may save on future interest charges and shorten the term of your mortgage. Many lenders allow overpayments within certain limits, so it’s worth checking if this is an option for you. Paying off even a small amount extra each month could make a significant difference in reducing the total cost of your mortgage over time.
Switching to an interest-only mortgage is another option. This can lower your monthly payments, as you will only be paying off the interest rather than the loan itself. However, it’s important to remember that the debt will remain at the same level unless you make extra payments toward the principal. While this option may be helpful in the short term, especially if your financial situation has changed, you’ll need a plan in place to eventually repay the outstanding balance, whether through savings, selling the property, or other means.
Another approach to managing mortgage costs is to extend the term of your loan. The traditional mortgage term is 25 years, but many lenders now offer longer terms of 30 or even 40 years. Extending the term can significantly reduce your monthly payments, making them more affordable. However, this means you’ll be paying off your mortgage for a longer period, and the total amount of interest paid over the life of the loan will be higher. This option may be worth considering if keeping your monthly payments lower is your main priority.