High street lenders have again increased their mortgage rates, as experts warn they could hit 7 per cent before the summer is out.
The base rate of inflation is expected to rise again in August, heaping more misery on property owners, many of whom are already struggling to keep up with repayments.
Why are mortgage rates rising?
Mortgage rates are rising due to the Bank of England consistently raising the base interest rate.
The Bank upped it to 5 per cent in June, and is likely to increase it by at least 0.25 percentage points in August, when its monetary policy committee (MPC) next sits. This would be a record 14th consecutive increase.
The Prime Minister, Rishi Sunak, has pledged to halve inflation by the end of the year, and one of the key tools for doing this is to raise interest rates, which in theory reduce spending power, lowering demand, and then prices.
Mortgage rates are closely tied to the base rate, so have also been rising steadily.
Swap rates, which determine how lenders price their fixed-rate mortgage deals, have increased to 5.95 per cent for one-year deals, while the average two-year fixed mortgage is 6.51 per cent. The typical five-year fix hit 6.02 per cent this week, and is expected to increase even further.
Chris Sykes, of brokers Private Finance, said: “There is every possibility we could see average rates hitting 7 per cent. If inflation doesn’t improve, this could be reached very quickly.”
David Hollingworth, from L&C Mortgages, added: “If the market carries on as it has been going, we will reach this level in the next couple of months.”
Lenders have little choice about raising rates, as demand remains high due to homeowners trying to secure the best deals before they disappear.
Mr Hollingworth said: “We are seeing that the constant changes in the market are creating a domino effect. Lenders are having to manage volume and keep on putting up prices to retain service levels. Those staying at the top of the best buys are bowled over with demand and then must pull rates and reprice higher.”
Halifax increased remortgage rates from 5 July by between 0.02 and 0.63 points, while TSB is upping its two-year fixed purchase and remortgage deals by up to 0.4 per cent. Lloyds and Santander have also increased the prices of their products.
When could mortgage rates go down?
The future of mortgage rates depend on the Bank of England’s interest rate decisions, which are beholden to inflation.
Mr Sykes said: “With the next inflation figures we could see that things are under control and rates will reduce but alternatively, if they do not change, it is likely rates will increase.”
Willem Buiter, a former external member of the MPC and ex-chief economist at Citigroup, told i: “I expect the Bank of England to raise the bank rate by 0.25 points to 5.25 per cent at the August meeting and again by 0.25 points at the September, November and December meetings, bringing it at the end of the year to 6 per cent.
“Headline inflation could come down in this month’s inflation release, but unless there is a meaningful decline in core inflation, the MPC will follow the trajectory I just outlined. They will also be looking closely at the behaviour of wage inflation.”
Michael Saunders, senior economic adviser at consultancy Oxford Economics and external member of the MPC from 2016 until 2022, said: “At this stage, I think an August hike is more likely than not, but by 0.25 points, rather than 0.5 points.
“Something like 8.2 per cent for June’s CPI inflation figure would, I think, lead them to hike 0.25 points, and not 0.5, on the grounds that they already responded in the June meeting. If the inflation data is much higher than that, it could lead to a 0.5-point rise in August. Much lower than that could even allow them to leave rates unchanged in August.”
Stephen Yiu, founder of Blue Whale Capital and the lead manager of the Blue Whale Growth Fund, added: “My view is that rates will go a lot higher – the inflation number is particularly sticky – because of the high inflation the UK is experiencing.
“For that reason, an interest rate of 6 or 7 per cent at the peak isn’t going to kill inflation – I actually think a rate of around 6 per cent may become a new normal for a long period of time.
“I expect a rise in August and then further rises on each of the dates this year, which would take rates to 6 per cent minimum. The alternative to this is getting used to life with very high inflation.”
