Mortgages are getting more and more expensive right now.
In fact, financial information company Moneyfacts revealed on Monday that the average two-year fixed rate mortgage has crept up to 6.01% – a rate not see since December, when the effects of the mini-budget were still hitting the market.
It also revealed that the average five-year fixed rate has climbed to 5.67%.
This means those with mortgages may end up paying hundreds more each year to hold onto their properties amid the cost of living crisis.
Despite this worsening situation, prime minister Rishi Sunak has indicated that his government have no plans to offer financial support for mortgage bills.
So just what is going on – and what can you do about it?
Why are mortgages becoming so expensive?
Mortgage rates have been increasing steadily every time the Bank of England increased interest rates, because this means the rate of borrowing goes up.
The Bank is meant to keep inflation at 2% by controlling interest rates. However, inflation has been stubbornly high throughout the cost of living crisis – it’s currently at 8.7% – something which really kicked off when Russia invaded Ukraine back in February 2022.
The Bank has increased interest rates 12 times in row – making it the sharpest, fastest rise in rates since the 80s – and they’re expected to raise rates again later this week. It is currently at 4.5%, having being at 0.5% for 13 years.
Laith Khalaf, head of investment analysis at AJ Bell, told Sky News that the Bank is “caught between a rock and a hard place” between putting pressure on mortgage borrowers and letting inflation spiral.
There are different types of mortgages, though.
Firstly, standard variable rates, which change according to the lender’s decision.
Then fixed rates, which are set for a certain number of years – when that comes to an end, borrowers remortgage, or are moved to standard variable rates.
And finally, tracker rates, which rise and fall in line with the Bank’s interest rates.
Why is this important?
As Moneyfacts reports, a person with a £250,000 mortgage for five years, first set in 2018, would have paid around £1,175 per month – but now this works out to be £1,553 per month.
Less than 30% of UK households have a mortgage, but that still means 7.5 million people in the UK hold a record of £1.7trillion of mortgage debt.
With so many mortgages in the UK being short-term, this was always going to spell trouble, as they are so reliant on fluctuations in interest rates.
And variable rate mortgages are even more affected as they directly connected to bank rate.
This means those re-mortgaging could see a sharp rise in their repayments while first-time buyers will lose their purchasing power.
Will the government intervene?
From the looks of it, no – even though it helped wit the furlough job scheme during Covid and the Energy Price Guarantee over winter.
Sunak told ITV’s Good Morning Britain: “I know the anxiety people are going to have about mortgage rates.
“The first priority at the beginning of the year was to halve inflation – that’s the best and most important way that we can keep costs and interest rates down for people.
“We’ve got a clear plan to do that. It is delivering. We need to stick to the plan.”
He signalled that first time buyers already have support, as do mortgage interest scheme, and made it clear he is focused on bringing inflation below 5%.
The Support for Mortgage Interest is available for people on certain benefits. This is where some mortgage interests are paid by the government in the form of a loan – but it has its own interest rates.
This can then be paid off when the property is sold or when they die.
Levelling up secretary Michael Gove did tell BBC’s Laura Kuenssberg on Sunday that mortgage assistance is being “kept under review”, but suggested that it would be a decision for the Treasury.
According to Sky News, a Treasury source also said: “Borrowing money to subsidise mortgage risks fuelling inflation further, forcing the Bank of England to respond with eve higher interest rates. It would be totally self defeating.”
Former Bank of England deputy governor Sir Charlie Bean has discouraged the government from wading into the mortgage situation, saying it’s too “risky” for Downing Street to do so as interest rates continue to climb.
There are also fears that if the government offers help to those with a mortgage, it might push out older voters who bought their homes outright and the younger people who can’t afford to buy.
What will happen next next?
The Bank is expected to announce more interest rate rises on Thursday, possibly up to 4.75%.
The Resolution Foundation think tank estimates the average annual mortgage repayments will climb by £2,900 for those renewing next year.
It also predicts that the average two year fixed rate mortgage will not fall below 4.5% until the end of 2027 – and that they’re looking at a £200 increase in their monthly repayments if the rate increased by 3%.
Around 1.3 million households will reach the end of their fixed-rate term from April to the end of the year, according to the Bank of England – and most of those rates had interest rates below 2%, meaning they’re in for a shock.
However, the Office for Budget Responsibility has also suggested that house prices will fall by 10% by 2024 compared to last year’s highs, because interest rates put them off.
That means you could owe your lender more money than your property is currently worth on the market.
What can you do if you’re worried about your mortgage repayments?
Speak to your mortgage provider as soon as you can, and they may offer other options to help you with your monthly payments.
That could include extending the mortgage terms, paying more over the longer term or taking a mortgage holiday.
Speaking to them will not affect your credit rating, according to Which?, but acting on any of these options might.
What if you miss a mortgage payment?
You’ll be in arrears with your mortgage provider if you miss two or more months’ repayments.
Your lender has to treat you fairly by discussing how you pay, according to the Financial Conduct Authority. They may offer lower payments for a brief time.
But, this will all be reflected on your credit file and your credit rating, meaning it might be harder to borrow in the future.
You must contact your lender as soon as you realise you might struggle to meet your repayments.
Within 15 days of falling into arrears, your lender will tell you your total arrears, the amount outstanding on the mortgage, the missed payments, and any additional charges.
In rare circumstances, you may lose your home – but the lender has to go through several hoops before that, and it may take up to two years.