Why Are Mortgage Costs Rising Despite Interest Rate Cuts?

Mortgage costs are climbing, with the average rate for a two-year fixed deal now at 5.5%, even after the recent Bank of England base rate cut. Major lenders like Barclays, HSBC, NatWest, and Nationwide have all increased rates on new fixed deals, frustrating borrowers who hoped costs would consistently decrease. Events like the recent Budget have added upward pressure on borrowing costs, indirectly affecting home loans.

How Mortgage Rates Impact Borrowers

While tracker and variable-rate mortgages align closely with the Bank of England's base rate, over 80% of mortgage customers have fixed-rate deals. These remain unchanged until the fixed term—typically two or five years—ends.

The challenge is significant for:

• Existing borrowers: Many will face higher rates when their current fixed-rate deals expire. Around 800,000 fixed-rate mortgages, averaging interest rates of 3% or below, are set to expire annually until 2027.
• First-time buyers: Rising rates complicate affordability for those looking to purchase their first home.

Mortgage rates have spiked twice in the past two years, peaking at 6.85% in August 2023, according to Moneyfacts. Although rates are now lower, they remain elevated, with:

• The average two-year fixed rate at 5.5%.
• The average five-year fixed rate at 5.22%.

Even the most competitive deals, often reserved for buyers with substantial deposits, have risen above 4%.

Why Are Mortgage Rates Increasing When Interest Rates Are Falling?

On 7 November 2024, the Bank of England reduced the base rate from 5% to 4.75% to ease borrowing costs. However, this reduction had minimal impact on mortgage rates due to broader market dynamics:

1. Anticipation of Rate Cuts
   The Bank’s move was widely expected, so lenders had already priced it into their calculations.

2. Cautious Future Cuts
   The Bank hinted that future rate cuts would be slower and less frequent than anticipated, shifting market expectations to a “higher for longer” scenario.

3. Impact of the Budget
   Chancellor Rachel Reeves’ Budget introduced spending measures that could fuel inflation, complicating the Bank’s ability to reduce rates further. This uncertainty has influenced lenders’ pricing decisions.

David Hollingworth, of broker L&C, noted that the higher cost of borrowing for lenders has led to incremental mortgage rate increases. While there’s no expectation of rates soaring as they did in recent years, markets are adjusting to a slower decline in interest rates.

The Challenges of Timing and Availability

Although interest rates are expected to trend downward in the long run, timing is critical for borrowers. Mortgage deals currently have short shelf lives due to market volatility.

• Renewals: Borrowers with expiring deals should monitor rates closely, as lenders rarely notify customers about upcoming increases.
• Best-buy deals: Standout offers are fleeting, making it essential to act quickly.

Tips to Make Your Mortgage More Affordable

1. Make Overpayments: If you’re on a low fixed-rate deal, consider paying more now to reduce future debt.
2. Switch to Interest-Only Payments: Lower monthly costs by paying just the interest, though the principal remains outstanding.
3. Extend Your Mortgage Term: Lengthening the term to 30 or even 40 years can make payments more manageable, though it increases the total cost over time.