Interest rates rise again but mortgage rates keep falling

Despite increases to the cost of borrowing, fixed rate mortgages are continuing to come down, falling by 0.35% for two-year deals and by 0.43% for five-year ones.

The Bank of England has increased interest rates by 0.5% to 4%, the highest level since October 2008.

It was the 10th consecutive meeting at which the Monetary Policy Committee (MPC) has hiked the official cost of borrowing, as it continues to try to bring down high inflation.

The latest increase adds a further £60 a month to repayments for homeowners with a £200,000 mortgage.

People with variable rate mortgages have now seen their monthly mortgage costs jump by £440 since the MPC first started to raise interest rates from 0.1% in December 2021.

An estimated 850,000 homeowners have a tracker mortgage, and 1.1 million are on their lender’s standard variable rate – both of which move up and down in line with changes made to the Bank Rate.

But despite increases to the cost of borrowing, the average rate charged on new fixed rate mortgages has continued to come down, falling by 0.35% for two-year deals and by 0.43% for five-year ones, offering hope to those who need to remortgage in the near future.

There was further good news for borrowers, with the tone of the minutes that accompany the MPC’s interest rate announcement suggesting the Bank Rate could be close to peaking.

There was a notable shift in language, with the MPC saying there “would” be further increases to interest rates “if” there was evidence of persistent inflationary pressures.

This contrasts with its previous statements that it would continue to “respond forcefully” and “take the actions necessary” to get inflation back down to its target.

Two members of the nine-strong MPC also again voted to leave rates unchanged.

Why has the Bank Rate been increased?

The MPC began increasing interest rates from their record low in December 2021 in a bid to bring down inflation.

Despite increasing the Bank Rate by 3.9%, inflation, which measures the rate at which the cost of goods and services increases, has remained stubbornly high.

The latest figures show it stood at 10.5% in December, down only slightly from November’s figure of 10.7%, and still well above the MPC’s target of 2%.

Part of the problem for the MPC is that inflation is being stoked by external factors, such as the conflict in Ukraine which has pushed energy prices higher.

But inflation does now appear to be on a downward trend, and is expected to fall to around 4% by the end of this year.

In further good news, the MPC also said it expects the UK’s recession to be less severe than previously thought.

It is now predicting that it will last for only one year, rather than two, with economic growth contracting by just 1%, rather than the 2.9% previously predicted.

Economists now expect the Bank Rate to peak at 4.25% later this year, following the MPC’s latest announcement.

What should I do about my mortgage?

Despite interest rates increasing by 1% since the end of October, the cost of fixed rate mortgages has been moving in the opposite direction, falling by just over 0.9% during the same period.

Interest charged on fixed rate mortgages shot up at the end of September last year in the wake of then Chancellor Kwasi Kwarteng’s mini-Budget.

It triggered a sharp rise in government borrowing costs - which influences the rate at which lenders borrow money for fixed rate mortgages.

But they have been easing downwards since Jeremy Hunt took over as Chancellor, and this trend is expected to continue in the coming months.

After hitting highs of around 6%, mortgage rates for new business are now generally below 5%, and they are expected to remain in the 4% to 5% range for most of 2023.

There is also good news if you are planning to remortgage but are worried about passing your lender’s affordability test due to the rising cost of living.

Following a meeting with the government and the regulator, lenders have agreed to allow customers who are up to date with their payments to switch to a new mortgage deal without having to do another affordability test.

If you are on a fixed rate mortgage

More than 1.4 million homeowners are on fixed rate mortgages that are due to expire this year.

If your deal is due to end soon, you should start looking around for a new rate now, as lenders will allow you to book on to a new rate up to six months before your existing one ends.

But if you see a deal that you like the look of, you need to be prepared to move fast, as the average mortgage is currently only available for 15 days before lenders withdraw it.

The average interest rate charged on a two-year fixed rate deal is currently 5.44%, while on a five-year one it is 5.2%.

But it is important to remember that these rates are just averages, and best buy deals for people with large equity stakes in their property are available for below 4%.

If your current mortgage deal is not due to end soon, you don’t have to do anything, as the rate you are paying now will stay the same until the end of your product term, even if interest rates increase further.

If you are on a standard variable rate (SVR) mortgage

The interest charged on SVRs has been steadily increasing since December 2021, as rates on these automatically move up and down in line with changes to the Bank Rate.

The average interest rate charged on an SVR was already 6.84% before today’s announcement, and it is likely to rise above 7% following the latest hike.

As a result, you are likely to want to look into remortgaging on to a more competitive rate.

Remortgaging from an SVR of 6.84% to an average two-year fixed rate deal of 5.44% would save you nearly £175 per month, based on a £200,000 mortgage.

If you are on a tracker mortgage

If you are on a tracker mortgage, your rate will automatically increase following today’s interest rate rise.

Remortgaging to a fixed rate deal would protect you from any further interest rate increases, but economists are now predicting that the Bank Rate is close to peaking.

If you stay on your current deal, the cost of fixed rate mortgages may have fallen further by the time you need to remortgage.

When making a decision, it is important to think about how much slack you have in your budget to afford your mortgage repayments if the Bank Rate rises by more than is currently expected.

What can I do if I’m struggling with my mortgage?

If you are struggling with your mortgage payments, there are two main ways you can make them more affordable.

The first is to increase your mortgage term.

For example, monthly repayments on a £200,000 mortgage on a fixed rate of 6% would be £1,450 if you are repaying it over 20 years.

But monthly repayments fall to £1,210 if you increase the term to 30 years. They fall even further to £1,150 if you repay the mortgage over 35 years.

If you do decide to go down this route, it is important to understand that although it will reduce your monthly repayments in the short term, you will end up paying a lot more interest over the entire life of your mortgage.

The second option is to talk to your lender about being put on to an interest-only mortgage for a period of time.

Only paying interest significantly reduces your monthly payments, although it does mean that the amount you owe is not being reduced, so you will need to resume full repayments at some point.

If you are really struggling, you can ask your lender for a short-term payment holiday. This enables you to take a break from making repayments, with the interest portion of your monthly payment added to your outstanding mortgage debt.

If you think you may run into difficulties, it is important to contact your lender as soon as possible.

Lenders are obliged by the regulator to work with customers who are struggling with mortgage repayments to find a solution, and they can only repossess a home as a last resort.

But options become much more limited if you have already missed a payment.

Key takeaways

• The Bank of England has increased interest rates by 0.5% to 4%, the highest level since October 2008
• Yet mortgage rates are continuing to fall, and economists believe the Bank Rate is now close to peaking
• Nearly 2 million homeowners with variable rate mortgages will see their monthly repayments rise by a further £60 a month, based on a £200,000 loan

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by Blackstones

Energy efficient homes holding their value in market slowdown

Potential buyers are showing a greater interest in homes with high energy efficiency ratings.

Energy efficient homes are outperforming other properties in the current housing market.

Six out of 10 estate agents say homes with high energy efficiency ratings are holding their value despite the overall market slowdown, according to the Royal Institution of Chartered Surveyors.

At the same time, 40% said they are seeing more interest from potential buyers in energy efficient homes.

And 41% said sellers are attaching a price premium to their home if it has a high energy efficiency rating.

Mairead Carroll, senior specialist in land and property standards at RICS, said:

“It will be fascinating to see how important energy efficiency becomes to buyers over the next 12 months.”

The survey reflects our own findings that buyers are becoming more value-conscious due to higher mortgage rates, inflation and the cost-of-living squeeze.

The average household has seen its gas and electricity bill double from £1,277 per year at the start of 2022 to £2,500 now.

The government’s Energy Price Guarantee has kept bills lower than they might otherwise be. It limits the amount suppliers can charge per unit of gas or electricity.

But the guarantee will change in April and the average annual bill for gas and electricity is expected jump to around £3,000.

These rising costs have led to home buyers increasingly factoring in the cost of heating a home to their moving decisions.

The growing appeal of energy efficient homes isn’t just because buyers want to save money on their bills.

Banks and building societies are also factoring in energy costs when assessing whether people can afford a mortgage.

If a lender thinks your budget is too tight to cope with further increases to energy costs, they may only be prepared to lend you a lower amount.

First-time buyers and those on lower incomes are most likely to be impacted.

On the other hand, if you can show lenders that your home has a high energy efficiency rating - and so it costs less to run and heat - they’re less likely to be concerned about your impact to manage future gas and electricity price rises.

Properties are given an Energy Performance Certificate (EPC) which rates their energy efficiency on a scale from A to G.

Find out your EPC rating - GOV.UK

A is the most efficient EPC rating and G is the least efficient. If you’re selling or renting a property, it’s a legal requirement to have an up-to-date EPC rating.

While 80% of new-build homes have an EPC rating of A or B, only 3% of older properties have a rating this high.

There are a number of steps you can take to make your property more energy efficient.

Insulating your loft will prevent up to 25% of heating being lost through the roof, while installing cavity wall insulation will help to stop 35% of heat being lost.

Installing double or triple glazed windows or replacing an old boiler with a new energy efficient one will also make your home cheaper to run.

On a smaller scale, using energy efficient light bulbs and sealing any gaps letting in draughts in your home will also have an impact.

There are a number of schemes to help you carry out energy efficiency home improvements.

If you’re claiming certain benefits, energy companies have an obligation to help you under the Energy Company Obligation scheme.

The scheme will pay for loft or cavity wall insulation (as long as it’s suitable for your home), double glazing, and even a new boiler if your current one has broken.

Energy Company Obligation scheme - Ofgem

If you own a home in England or Wales, the Boiler Upgrade Scheme can give you £5,000 towards the cost of an air source heat pump or biomass boiler.

Or you can get  £6,000 towards the cost of a ground source heat pump.

Boiler Upgrade Scheme - GOV.UK

Another option is the Green Homes Grant Local Authority Delivery Scheme.

Grants averaging £10,000 are available to homeowners to install solar PVs, air source heat pumps, and loft, underfloor, external wall and cavity wall insulation.

To qualify, you must have a household income of less than £30,000 a year and your home must have an EPC rating of D, E, F or G.

You can apply through your local council.

Green Homes Grant - GOV.UK

The government also recently launched the Green Home Finance Accelerator scheme.

Under this scheme, £20 million is being made available to lenders to fund affordable loans for homeowners carrying out energy efficient improvements.

Green Home Finance Accelerator scheme - GOV.UK

Key takeaways

• Energy efficient homes are outperforming other properties during the current challenging market conditions
• Six out of 10 estate agents said homes with high energy-efficiency ratings were holding their value
• Four out of 10 said they were seeing more interest in energy efficient homes from potential buyers

 

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by Blackstones