UK two-year fixed mortgage rates hit a 15-year high as MPs grill lenders

The average two-year fixed mortgage rate rose to 6.66% on the morning of Tuesday (11 July), the highest rate since the 2008 financial crisis.

Data provider Moneyfacts reported interest rates rose from 6.63% on Monday, which took the cost of two-year mortgages above the peak of 6.65%, which was set on 20 October 2022 after Liz Truss’ disastrous mini-budget.

The average five-year fixed-rate homeowner mortgage also peaked at 6.51% on that date, according to Moneyfactscompare.co.uk.

Mortgage rates later settled down, but then started to rise again on expectations interest rates will be higher for longer as the Bank of England tries to tackle stubbornly high inflation.

The Bank of England uses base rate rises as a tool to try to subdue inflation and the base rate is currently sitting at 5%, following 13 rises in a row.

This comes as average wages, excluding bonuses, were 7.3% higher in the three months to May compared with the same period last year, according to the Office for National Statistics (ONS). 

Moneyfacts’ figures also show that the average five-year residential mortgage hit 6.17% on Tuesday. The website took the full range of mortgage deposit sizes into account.

Chancellor Jeremy Hunt recently held a summit with mortgage lenders resulting in a new mortgage charter to support those struggling.

Lenders will be able to offer borrowers a switch to interest-only payments for six months, and an extension to their mortgage term to reduce their monthly payments, with the option to switch back within six months. Both options can now be offered without an affordability check.

A borrower will not be forced to leave their home without their consent unless in exceptional circumstances, in less than a year from their first missed payment.

The Financial Conduct Authority (FCA) has moved quickly to make rulebook changes.

A new consumer duty, which takes effect at the end of July, will also compel lenders to offer support that meets a customer’s individual needs, communicate clearly with people about their options and provide decent customer service.

Lisa Nandy MP, Labour’s Shadow Housing Secretary, said: “Too often, families who are saving for their first home but getting no closer to buying it feel like they’re doing something wrong.

"But the fact of the matter is that the Tories have inflicted households with a mortgage bombshell, let renters down and failed to build the homes we need. Millions are feeling the pain from this Tory economic failure.    

"Labour has a plan to start fixing this crisis. We would stop households missing out on the mortgage support they need by making measures mandatory, we will give greater rights and protections to renters, and we will take the tough choices to get Britain building."

In parliament, MPs on the Treasury Committee questioned mortgage providers on rising rates, house prices and forbearance. 

The panel was made up of: 

• Andrew Asaam, homes director, Lloyds Banking Group

• Bradley Fordham, mortgage director, Santander UK

• Charlotte Harrison, interim CEO (home financing), Skipton Building Society

• Henry Jordan, home commercial director, Nationwide

• Nigel Terrington, chief executive, Paragon Banking Group

According to Jordan, the increase of mortgage rates will mean customers are facing an average £235 increase per month, when their current deals expire - which is roughly an increase of a third. However, he also explained that customers are taking action to protect themselves from higher mortgage rates saying Nationwide has seen no material increase in arrears yet. 

Lloyds’ homes director Asaam agreed that arrears are still very low in a historical context, and are below Covid-19 levels - although he said there has been a small uptick. 

Santander has seen a similar pattern, citing that despite a small uptick in arrears they are still 20% below their pre-pandemic levels, and 70% below their 2009 levels after the financial crisis. Fordham said mortgage customers coming off deals and going on to new ones are seeing payment increases of “over £200 per month”.

Skipton Building Society said it is expecting to see more customers with financial stress, and interim CEO Harrison stated that most customers have paid off the capital they borrowed, so remortgage amounts will have fallen. 

Lenders will be able to offer borrowers a switch to interest-only payments for six months, and an extension to their mortgage term to reduce their monthly payments, with the option to switch back within six months.

Fordham said the bank will encourage customers to contact it to go through their options, adding: “If a customer can afford the increased payments, longer term it’s better for them because they will pay less interest of course.” However, Assam says his company has seen a move towards a shorter fixed term in the hopes interest will come down. 

Asked by the committee what lenders can do above and beyond the charter and what is already being done to minimise the risks of repossessions or distress, Asaam told MPs that customers are allowed to select new products six months before their existing mortgage maturity, adding: “That allows them to plan.”

Asaam said house price falls could leave some mortgage holders in negative equity, with first-time buyers most exposed.

He said: “We need to make sure that those first-time buyers are resilient, ie they can afford to stay in their homes through a two-year period where house prices might be falling, for example, and they are aware that they could end up in negative equity.”

The Commons Treasury Committee was told that because of relatively low loan-to-value rates across the market, there was less risk of widespread negative equity than in previous financial crises.

Jordan said house prices had already fallen by around 4% from the peak last year, with further drops expected to around a 6.5% decline, however, that would not significantly increase the amount of homeowners with loans exceeding the value of their property.

He said this was because only around 2.5% of homeowners had a loan-to-value rate higher than 90%, partly because of the boom in house prices during the pandemic, “so there’s headroom”.