‘Painful’ mortgage warning for 700,000 households as rates set to rise
HUNDREDS of thousands of homeowners are facing higher mortgage costs this year amid mounting worries around the UK economy.
Around 700,000 households are currently on fixed-rate deals due to end in 2025.
An increase in government borrowing costs to a 27-year high this week sent the pound plunging and fuelled concerns that the economy is slowing.
This is expected to have a knock on effect on mortgage rates in a fresh blow to households.
The government issues bonds, also known as gilts, when it needs to borrow money, with the interest on them called yields.
But gilt yields have been rising with investors concerned inflation in the UK could stay higher for longer.
Investors are also concerned the UK economy will not perform and are betting against it, which is also pushing up yields.
When gilt yields rise, so do swap rates, which are used by banks and lenders to set the rates offered on fixed-rate deals.
Two year swap rates, which are based on what the markets think interest rates will be over the next 24 months, have increased sharply from 4% in mid-December to more than 4.5%.
Mortgage rates had been expected to fall this year but could now rise instead.
Nicholas Mendes, from broker firm John Charcol, said: “The coming year could be another painful one for mortgage holders, as government borrowing continues to exert significant pressure on mortgage rates through its impact on gilts and swaps.”
The start of the year saw some lenders including Halifax and HSBC, lower rates in what some experts described as a “mini price war”, though others like TSB and Virgin introduced increases.
Mark Harris, chief executive of mortgage broker SPF Private Clients, said: “If government borrowing stays high and swaps continue to rise, then other lenders may well follow suit and increase their mortgage rates.
“Borrowers should not panic, however, and seek advice from a whole-of-market mortgage broker.
“Rates can be booked several months before required so it’s worth reserving something now for peace of mind; if rates have fallen by the time you come to take out the mortgage, you should be able to switch to a lower rate then.”
An estimated 690,000 in 2025 are coming to the end of a fix lasting three, four or five years, according to Savills, with the majority (575,000) on five-year deals.
Different types of mortgages
We break down all you need to know about mortgages and what categories they fall into.
A fixed rate mortgage provides an interest rate that remains the same for an agreed period such as two, five or even 10 years.
Your monthly repayments would remain the same for the whole deal period.
There are a few different types of variable mortgages and, as the name suggests, the rates can change.
A tracker mortgage sets your rate a certain percentage above or below an external benchmark.
This is usually the Bank of England base rate or a bank may have its figure.
If the base rate rises, so will your mortgage but if it drops then your monthly repayments will be reduced.
A standard variable rate (SVR) is a default rate offered by banks. You usually revert to this at the end of a fixed deal term, unless you get a new one.
SVRs are generally higher than other types of mortgage, so if you’re on one then you’re likely to be paying more than you need to.
Variable rate mortgages often don’t have exit fees while a fixed rate could do.
This means the majority locked in when rates were far lower before the disastrous Liz Truss mini Budget in 2022 which saw rates soar.
Around 350,000 homeowners coming to the end of two year fix who are remortgaging this year are expected to see their rate fall as they locked in when rates peaked.
After sharp rises in 2022 and 2023, interest rates started to fall from a 16-year-high of 5.25% last year, with the Bank of England (BoE) voting twice to cut the base rate bringing it down to 4.75%.
Mortgage rates has been expected to fall in 2025 with experts predicting that the central bank would cut the base rate three times this year from the current 4.75% to 4% by the end of the year.
The base rate is also used by banks to set rates offered on a savings and borrowings, including mortgages.
Tracker mortgage rates are directly linked to this benchmark rate. Those on a fixed deal are locked in for a set time so are not immediately affected, but may be later when they come to remortgage as new deals on the market will reflect any change.
In total around 1million will see their deals end this year, down from 1.2million last year, Savills said.
In November the Bank of England warned that a total of 4.4million households can expect to see increases to their repayments over the next three years.
A typical household rolling off a fixed-rate mortgage in the next two years is due to face a jump of around £146-a-month, it said in a report at the time – down on the previous projection of £180 in June.
The central bank also warned that the risk to the economy has increased in the last six months following the election of a swathe of new governments across the globe.
How to get the best deal on your mortgage
IF you're looking for a traditional type of mortgage, getting the best rates depends entirely on what's available at any given time.
There are several ways to land the best deal.
Usually the larger the deposit you have the lower the rate you can get.
If you’re remortgaging and your loan-to-value ratio (LTV) has changed, you’ll get access to better rates than before.
Your LTV will go down if your outstanding mortgage is lower and/or your home’s value is higher.
A change to your credit score or a better salary could also help you access better rates.
And if you’re nearing the end of a fixed deal soon it’s worth looking for new deals now.
You can lock in current deals sometimes up to six months before your current deal ends.
Leaving a fixed deal early will usually come with an early exit fee, so you want to avoid this extra cost.
But depending on the cost and how much you could save by switching versus sticking, it could be worth paying to leave the deal – but compare the costs first.
To find the best deal use a mortgage comparison tool to see what’s available.
You can also go to a mortgage broker who can compare a much larger range of deals for you.
Some will charge an extra fee but there are plenty who give advice for free and get paid only on commission from the lender.
You’ll also need to factor in fees for the mortgage, though some have no fees at all.
You can add the fee – sometimes more than £1,000 – to the cost of the mortgage, but be aware that means you’ll pay interest on it and so will cost more in the long term.
You can use a mortgage calculator to see how much you could borrow.
Remember you’ll have to pass the lender’s strict eligibility criteria too, which will include affordability checks and looking at your credit file.
You may also need to provide documents such as utility bills, proof of benefits, your last three month’s payslips, passports and bank statements.
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