The Bank of England raised interest rates on December 15 from 3.0% to 3.5%. The 0.5 percentage point increase marked the ninth rise since December 2021, when the bank rate stood at just 0.1%. It put the bank’s rate at its highest level since 2008 and has put further upward pressure on the cost of borrowing.
Volatility and uncertainty
Mortgage costs also skyrocketed after last September’s ill-fated mini-budget due to sterling volatility and market uncertainty. Major lenders including NatWest, Barclays, Halifax and Virgin Money closed deals and brought them back to market at higher prices.
Rishi Sunak’s appointment as Prime Minister helped settle the markets and the average cost of fixed-rate mortgages has continued to decline from its peak.
Average costs of popular offers
According to our mortgage partner, Better.co.uk (formerly Trussle), the average cost of fixed rate transactions across all deposit levels is currently 5.09% (two-year fixed), 5.02% (fixed three years) and 4.75%. (five year arrangement). This compares with highs of over 6.50% in October.
Better.co.uk says the most competitive offers are 4.55% for a two-year solution and 4.33% for a five-year solution. Currently, long-term solutions are cheaper with the best 10-year fixed rate offer priced at 4.04%.
The average two-year follow-up rate today is 4.09%, while a typical standard variable rate (SVR) is 6.31%, according to Better.co.uk.
Their data also shows that the average loan size approved as of January 2023 is just over £200,000, against an average property value of £335,000.
Currently, there are around 4,000 residential mortgage offers on the market. The number is up since last fall’s mini-budget when it plummeted to 2,560. However, it is still a long way from the more than 5,300 offers on the market in December 2021, before interest rates began to rise.
A stable political outlook coupled with a slight drop in the annual rate of inflation to 10.7% could ease the pressure on the Bank of England to raise interest rates further in 2023. We’ve gathered some expert views on how this could affect the mortgage market.
The next decision to be taken by the Bank’s Monetary Policy Committee (MPC) is scheduled for February 2, 2023.
Interest rates and mortgages
So what do rising interest rates mean for the cost of mortgages so far?
The estimated two million homeowners on variable rate deals, like base rate trackers, will see an almost immediate increase in their monthly payments following the Bank’s latest rate increase to 3.5%. As an example, a tracking fee that increases from 4% to 4.50% costs around an extra £50 per month on a £200,000 loan.
Those with fixed-rate offers, where the interest rate is locked in for, say, two or five years, won’t see any difference in their monthly payments. But when their deal comes to an end, they may be required to pay a higher rate on their next mortgage due to recent major bank rate increases.
Calculate the monthly cost of a mortgage against various interest rates with our mortgage calculator.
House prices and stamp duty
While still out of affordability for many, UK house prices are starting to fall. The average sale price of a property listed on Rightmove in December is £359,137, according to the website’s latest figures.
While this is 5.6% higher than last December, it is a marked slowdown from the annual growth rate in November, which was recorded at 7.2%.
On a monthly basis, sales prices have fallen 2.1%.
Rightmove’s Tim Bannister said: “The price drop is an understandable short-term reaction to the economic turmoil we saw in late September and October, before things started to calm down.”
Rightmove expects median home prices to fall an additional 2% over the course of this year.
The Stamp Duty cuts announced in the mini-Budget raised the zero rate band on property purchases from £125,000 to £250,000. While U-turns were made to the other tax breaks announced under former Prime Minister Liz Truss, this one has stuck.
Why are interest rates going up?
The Bank’s MPC uses interest increases as a means to cool the economy and control rising inflation. The Consumer Price Index (CPI) measure of inflation rose to a dizzying 11.1% in the 12 months through October. And although in November it fell again to 10.7%, these figures must be compared with the government’s target of 2%.
If inflation remains stubbornly high, some forecasters suggest the bank rate could hit 4.5% this year.
One of the main long-term drivers behind rising inflation is the cost of energy. Under the regulator Ofgem’s energy price cap, annual bills for a typical household would have skyrocketed to £3,549 from 1 October, and further to £4,279 from 1 January 2023.
But the government has replaced the price cap with its own ‘cheapest’ energy price guarantee (EPG). This limits typical annual bills to £2,500 until March 31, 2023, followed by £3,000 from April 1, 2023 for another 12 months.
What mortgage offers are available?
With inflation rates and mobile banks on the rise, keeping track of mortgage costs is becoming more challenging, especially when rates change and transactions can close on a daily basis.
One easy way is to use our mortgage tables, powered by Better.co.uk.
To find out what deals are available at today’s rates for the type of mortgage you’re looking for, you’ll need to enter your personal criteria in the table below. This is what you should do:
- Select if the mortgage is for finance the purchase of a house or if it is a remortgage for an existing property
- Enter the property value and the mortgage amount You need. This will automatically generate a percentage known as your ‘loan to value’. The lower the value of your loan, the cheaper the mortgage rates available
- Check the appropriate box if it is a Buy-to-let or interest-only mortgage (you’ll need a payment strategy for these offers), or if you’re looking for a mortgage to finance a shared ownership property
- Finally, filter your search by the type of mortgage you want, for example, a two or five year old solution or tracker. The filter is set to a full 25-year mortgage term, but you can change it if necessary.
Here’s a live chart of the mortgage deals available today.
What else do I need to know?
Mortgage deals that offer the lowest rates usually come with fees attached. You can choose to pay them up front or add them to the loan. To account for the cost of the fee, sort the results by ‘initial period cost’ (in the ‘Sorted by’ dropdown menu).
Alternatively, you can sort the results by introductory rate, lowest rate, or monthly payment, even by the lender’s “tracking” rate at which the offer will revert at the end of the term.
The cheapest ones are reserved for larger deposit amounts, usually 60% of the property value or more. And, in all cases, you’ll need sufficient income and clean credit to be accepted for a mortgage.
If you want to see what your monthly mortgage payments would look like under different scenarios while overlapping with household bills, our Mortgage Calculator will crunch the numbers.
When can I start remortgaging?
Once issued, mortgage offers tend to be good for six months, although some lenders like Skipton Building Society honor offers for up to 12 months. If you’re looking to re-mortgage your current home, this means you can lock in a rate today, at no cost and with no strings attached.