What’s happening to UK mortgage rates? Interest rate forecast, why repayments could rise after inflation news

With the cost of living crisis squeezing personal finances, here’s the latest advice on what to do if your mortgage fixed-rate deal is coming to an end

For 18 months, people across the UK have been hit by a cost of living crisis driven by record inflation and soaring interest rates.

The latest chapter in this saga came on Wednesday (24 May), with the latest set of Consumer Prices Index (CPI) figures - the main way in which UK inflation is measured. They showed the rate of prices rises slowed from 10.1% to 8.7% in April 2023.

But this figure was not as low as economists, including those at the Bank of England, had hoped. Worse still, core inflation - the rate of price rises for goods and services excluding food and energy - actually climbed from 6.2% to 6.8%.

What all of this means is that we can expect yet another interest rates hike in June when the UK’s central bank meets again to decide how to set rates. It has already hiked the base rate to 4.5% - the highest level since the 2008/09 financial crisis - with many now expecting higher borrowing costs to remain with us until well into 2024.

So, what do these interest rate rises mean for mortgages - and can we expect mortgage rates to fall anytime soon?

What are current UK mortgage rates?

In the wake of the Mini Budget in September 2022, mortgage rates rocketed to more than 6%, having been around 2% just a year earlier. While repayment costs fell away over the next six months, they are now climbing again as a result of three consecutive months of worse-than-expected inflation data.

NationalWorld has put together a summary of the best deals on the market for different mortgage product types. But be aware that the following figures are likely to change between now and our next update, and therefore may not be available by the time you get to the offer stage of the mortgage process.

As of Friday (26 May), the best remortgage rates (where the loan to value (LTV) ratio is 60%) were sitting between 4.19% and 4.3% for shorter-term fixes (two or three-year deals) and longer-term deals (five to 10-year fixes) were lying between 3.99% and 4.04%, according to MoneyFacts.co.uk. Comparison site Uswitch has found that average market rates for a two-year fix (75% loan-to-value) had climbed 0.25% between 18 and 25 May to 5.6%, while five-year fixes had remained static at 4.78% over the period.

According to the ONS, 1.4 million will see their fixed-rate deal expire in 2023 (image: Adobe)According to the ONS, 1.4 million will see their fixed-rate deal expire in 2023 (image: Adobe)
According to the ONS, 1.4 million will see their fixed-rate deal expire in 2023 (image: Adobe)

For first-time buyers, MoneyFacts has found the best rates are slightly higher for short-term fixes at between 4.41% and 4.79% for two or three-year deals (with an LTV of up to 90%). The best longer-term deals are sitting above the 4.2% mark.

The estimated 773,000 people on standard variable rate (SVR) mortgages - the deals you automatically move to if your fix expires - are generally facing rates of 7.5% to 8.25%, with most having risen significantly in the wake of the 11 May interest rates hike, according to UK-wide broker L&C. Lender trade body UK Finance said the latest Bank of England decision was likely to add £15.14 to monthly repayments (£181 a year), bringing the overall hike since December 2021 to £266.48 a month, or £3,198 per year.

Meanwhile, those on tracker rates - mortgages which rise and fall depending on the UK central bank’s interest rates decision - have seen their monthly repayments go up by an average of £23.71 per month (more than £284 a year) since the last Bank of England decision. While this may not sound like much, the organisation calculates that monthly repayments are now £417.36 per month (£5,000 a year) higher than in December 2021. L&C says this type of mortgage proved popular during the economic turmoil seen last autumn but added that “borrowers will need to think carefully” about staying on one amid expectations that interest rates will continue to climb.

For an estimated 195,000 homeowners who are described as ‘mortgage prisoners’ - i.e. people who have been struggling to access cheaper mortgage deals since their lender collapsed in the 2008 financial crash - the latest market movements will come as a serious shock. Money Saving Expert Martin Lewis said typical rates for these households had risen from 4.5% to as much as 8.29% by early March (before the latest rates decision). Mr Lewis has urged the government to find “any and all solutions” to help these borrowers.

Will mortgage rates go up?

There is a lot of uncertainty about where interest rates - a key factor in setting mortgage rates - will go next. Given inflation has already surprised us in 2023, no one truly knows whether they will stay as they are or go up again.

Uncertainty is engulfing the housing market (image: AFP/Getty Images)Uncertainty is engulfing the housing market (image: AFP/Getty Images)
Uncertainty is engulfing the housing market (image: AFP/Getty Images)

Until the latest set of inflation data in May, the consensus was that we were approaching the peak in this cycle of base rate hikes. On 11 May, the Bank of England forecast inflation would fall below its 2% target from late 2024, meaning it was likely to stop raising interest rates in the near future. Some, like analysts ING Economics and Capital Economics, predicted rates were unlikely to increase again, while others, including AJ Bell, anticipated another one or two increases to 4.75% or 5%.

But with the new CPI data, markets are now pricing in further hikes up to 5.5% over the remaining five Bank of England interest rates meetings of 2023. It would mean interest rates would be at their highest level since 2007. This news has also hit bond markets and swap rates - two other key factors that influence mortgage rates.

The latter of these is particularly vital for fixed-rate mortgages. Swap rates are complicated financial instruments that are set by what markets think interest rates will be. The key thing you need to know about them is that when swap rates rise, mortgage lenders are likely to increase their rates to maintain their profit margin. They can also be extremely volatile, so sudden increases may not necessarily feed into higher mortgage rates.

Homeowners are being told to act now on their mortgages (image: Getty Images)Homeowners are being told to act now on their mortgages (image: Getty Images)
Homeowners are being told to act now on their mortgages (image: Getty Images)

The long and short of all of these movements is that mortgage rates are likely to increase in 2023. This will not affect everyone immediately, given most households are on fixed rate deals. But as people roll off these deals (the ONS estimates 1.3 million households are expected to need to remortgage in 2023), they will be hit by big hikes in their borrowing costs.

Rising interest rates are also likely to mean higher interest costs will remain with us for longer - particularly if inflation continues to be sticky. So, even if you’re set to remortgage in 2024, or possibly even in 2025, you could find your mortgage bills rise significantly when you do. Before the latest CPI data was revealed, the Resolution Foundation think tank predicted mortgages would be likely to rise by anaverage of £2,300 a year (almost £200 a month) for the 1.6 million households whose existing deals are due to expire next year.

What should you do if you’re remortgaging?

In the first instance, NationalWorld recommends speaking to your lender and a mortgage broker to see what rate you can remortgage at. A broker will be able to provide the best advice on what options will suit you best.

Given further interest rate rises could be in the offing, Kellie Steed, mortgage expert at comparison site Uswitch, said those approaching the end of their fixed rate deals should consider a new fix. She said: “Fixed-rates are not so vulnerable to immediate change following the base rate as some other rate types, and some lenders actually lowered their purchase rates ahead of the increased base rate announcement [on 11 May], so it’s certainly worth looking at what’s available.

“Those on a tracker can expect an immediate 0.25% increase to their current interest rates and with future increases a distinct possibility, it might be time to consider other rate types. That said, the tracker deals are often lower than fixed rates to begin with, so it depends on your appetite for risk. If you’re still comfortably within a substantial fixed-rate deal there’s no need to worry for the time being. If you’re on a longer deal, the market could be in a slightly less volatile position by the time your deal comes to an end, as inflation is expected to continue falling, albeit gradually.”

Money is set to be tighter until interest rates fall (image: Getty Images)Money is set to be tighter until interest rates fall (image: Getty Images)
Money is set to be tighter until interest rates fall (image: Getty Images)

HomeOwners Alliance CEO Paula Higgins also warned consumers against falling onto their lender’s SVR rate given they tend to be well above fixed deals. “A lot of homeowners will just assume staying put on their current deal must be better than paying 5%,” she said. “But if you’re on your lender’s standard variable rate, you could be paying significantly higher rates than this. In many cases standard variable rates are already around 8%, even before this latest increase. So we’re calling on homeowners to please pull out your paperwork and check what deal you’re on and what rate you’re paying. Because you could be saving hundreds every month.”

What to do if you’re struggling with cost of living

If a rise in monthly mortgage repayments could push your personal finances into the red, mortgage technical manager at broker John Charcol, Nick Mendes, gave four key bits of advice:

  • Speak with your mortgage lender as soon as an issue arises: being open with the lender early on will allow them to propose a solution to support you. It also avoids risk and costs from spiralling out of control. Solutions could involve changing monthly repayments for a short period, a mortgage holiday, or extending the term to lower your monthly payments.
  • Review your budget: prioritise what is important, speak with any other secured and unsecured lenders you are borrowing from as each one will be able to support you.
  • Review your protection insurance: if your circumstances have changed due to health or work conditions, you may find your policy covers you.
  • Speak to a mortgage broker: a whole of market broker will be able to ensure you get the right advice.