Plus: Why interest rates are on the rise
It is safe to say that we are all ready to see some stability in the UK mortgage market. And it may come in 2023. For some, it will represent an opportunity to climb onto the property ladder, while others may be forced out. For the latest news on the mortgage market (stamp duty cuts, rising mortgage rates) and predictions, here is what you need to know.
What is happening in the UK mortgage market?
The UK mortgage market continues to navigate turbulence, with lenders exiting agreed-upon deals and scrapping mortgage products. Former chancellor Kwasi Kwarteng’s mini budget, which was widely viewed as favouring high earners, heightened the concerns of existing and prospective homeowners and in turn spiked mortgage payments.
Despite the controversy surrounding Kwarteng’s announcement (would it boost growth or deepen inequality?), the silver lining for those wanting to purchase properties was cuts to stamp duty. This cut, however, did not affect most first-time homebuyers since stamp duty only applies to homes valued above a certain threshold, which was already higher than the average property price prior to the mini budget.
Regardless, higher mortgage rates are expected to eat into savings from the stamp duty cuts, which are among the few of Kwarteng’s measures that the new chancellor Jeremy Hunt has said will not be reversed.
After sovereign bond yields and Bank of England (BoE) rate expectations spiked, lenders pulled mortgage deals or priced them at a significantly higher level. Since the BoE’s base rate prices a variety of mortgages and loans, the costs for borrowers increased.
Why are interest rates rising?
The BoE’s Monetary Policy Committee increased interest rates to help steady inflation—which is at a 40-year high. Contributing factors to rising interest rates include uncertainty surrounding the war in Ukraine and the energy price cap. In April, the price cap increased by 54% to £1,971 and may have had an even more severe impact on household finances if not for changes to government policies.
On September 22, the BOE increased interest rates to 2.25%—the seventh increase since December 2021. At the time, bank rates were at 0.1%. The average two-year, fixed-rate deal currently sits at 4.09%, the highest it’s been in eight years, according to the Guardian. Over the next few months, more increases are predicted. Some experts are suggesting that rates could reach 5% by 2023. The BoE could raise rates when the next decision is announced on November 3.
However, homeowners have been impacted by more than climbing interest rates. Those looking to purchase properties or move homes are facing asking prices which are 10.5% higher than they were this time last year, according to a recent house price report from Halifax.
How will these affect the UK housing market?
The UK housing market is in for a tough 12 months, experts say. With a looming recession and a cost-of-living crisis putting pressure on homeowners, the mortgage base rate could increase and lenders may increase rates even further. Well into 2023, however, property prices—and rates—are expected to drop. While markets may not stabilise completely, 2023 should see less turbulence than this year.
And for anyone hoping to enter the market, the storm may carry with it a silver lining, with opportunities increasing as greater numbers of buy-to-let landlords exit the market, generating more properties for sale and therefore ensuring lower prices.
Will UK mortgage rates go up in the next five years?
Mortgage rates go up when interest rates rise. In 2022, the average rate on a five-year fixed mortgage rate has been predicted to increase by 0.3%, with an increase of just over 1% expected in 2023 and 2% in 2024. The BoE’s monetary policy committee is expected to announce an increase on November 03. However, any increase is predicted to be slower than the market consensus.
The Financial Conduct Authority said earlier this year that an average base rate of 3% is expected, ranging between 2.5% and 4%. This would mean the cost of borrowing money would be higher, with lenders passing on the costs to customers.
With inflation expected to decrease within the next few years, borrowers who renew their loans may face higher repayments. Homeowners who have had a difficult time paying off their mortgage may, however, find some relief. If, as has been forecast, lenders offer lower interest rates on new deals, borrowers might be able to afford higher loans than previously.
