Homeowners are facing a significant increase in mortgage rates, with the average two-year fixed rate mortgage surpassing 6 percent. This surge has left individuals looking to remortgage or purchase a home burdened with higher monthly bills. The recent inflation figures, which show the Consumer Price Index (CPI) remaining at 8.7 percent and core inflation continuing to rise, have put additional pressure on the Bank of England to raise rates beyond previous expectations. As a result, the base rate has been raised by 0.5 percent.
To understand the impact of base rate expectations on home loans and why mortgage rates have risen so rapidly, it is important to examine the factors contributing to this situation. Financial markets have predicted that the Bank of England will need to raise the base rate more than previously anticipated. This is due to the substantial increase in the UK’s official CPI inflation figure, which has soared past the 2 percent target and into double-digit figures. Although there was hope that inflation would decrease significantly by now, recent data from the Office of National Statistics has shown that CPI remains at 8.7 percent in April and core inflation has risen to its highest level in over thirty years.
The Bank of England was expected to raise the base rate by 0.25 percent to 4.75 percent in June. However, the stubborn inflation figure led to a more significant increase of 0.5 percent. Unfortunately, this is not seen as the final rise, as the Bank is projected to continue raising the base rate throughout the year. Some economists and market commentators even suggest that it could reach as high as 6 percent. This heightened expectation has caused both gilt yields and swap rates to increase, affecting mortgage pricing. Consequently, the average two-year fixed mortgage rate has risen from 5.34 percent in May to 6.19 percent in June. Even major lenders who do not rely on money markets to fund mortgage lending are withdrawing deals and increasing rates to manage demand.
The future trajectory of mortgage rates relies heavily on the outcome of inflation. If inflation eases and rate expectations stabilize, mortgage rates may cease to rise and potentially even decrease. However, given the current circumstances, it is essential for borrowers to plan for high mortgage rates. Experts advise against relying on sharp declines and suggest being prepared for rates to remain elevated for some time.
Homeowners facing the end of popular fixed-rate mortgage deals will experience significant increases in their monthly payments. For example, the average two-year fixed rate for a borrower with a 25 percent deposit has risen from 2.17 percent in June 2021 to 5.94 percent. This translates to a £417 difference in monthly payments for a £200,000 mortgage over 25 years. Similar increases can be observed for five-year fixed rate mortgages. To find the best mortgage rate, borrowers should consider their individual circumstances, such as the size of the loan, the value of the home, and the remaining mortgage term.
In conclusion, homeowners must navigate the current surge in mortgage rates due to factors such as inflation and base rate expectations. Understanding the causes behind these rising rates and planning accordingly can help borrowers make informed decisions about their home loans.
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