Data from the Bank of England has shown that mortgage rates in the UK rose at their fastest pace since 2012 in the six months to May. This has increased expectations of a cooling down of the property market following the boom brought about by the Covid-19 pandemic.
Figures from the central bank were published late last week, and the data showed that the average interest rate on new mortgages rose by 13 basis points in May. This took the average rate to 1.95%, reflecting an increase of 46 basis points compared to November. This marks the fastest six-month increase in a decade.
Mortgage lenders passing on BoE rate increases
The data has confirmed that mortgage lenders are now passing on the interest rate increases implemented by the Bank of England over the past six months to borrowers.
On a two-year fixed-rate mortgage deal with a 75% loan-to-value ratio, the average rate quoted increased from 1.2% eight months ago to 2.63% in May. This reflects the quickest increase since 1995 when records began. There was also an increase of 2 basis points on existing mortgages in May, taking the rate to 2.07%.
As the Bank of England continues to battle with soaring inflation, more interest rate increases are on the cards. It is widely expected that the base rate will increase from its current 1.25% to 3% by early 2023.
This could result in a loss of momentum in the property market. Experts from Oxford Economists have predicted that house price growth will plummet from the current level of 10% to negative figures next year.
Buyers rushing to secure mortgage deals
It was further noted that many buyers are now rushing to try to secure mortgage deals before further rate increases kick in. This is helping to support property prices along with the low housing stock supply and a strong UK labour market.
Tomer Aboody, director of property lender MT Finance, said: “With the prospect of higher mortgage rates on the cards, buyers are taking advantage of the last remaining lower rates before the inevitable spike, with those re-mortgaging desperate to lock into a fixed-term mortgage for as long as possible.”
Another industry expert, Andrew Montlake, managing director of mortgage broker Coreco, said: “Rates are rising at a rate of knots and people are getting in while they can, and fixing for as long as they can, whether through a house purchase or a re-mortgage.”
New buyers will be hit by rising mortgage rates and record house prices
Samuel Tombs, chief UK economist at Pantheon Macroeconomics, said rising mortgage rates and record prices meant new buyers would find themselves in a difficult financial situation. In the current climate, the level of income that new buyers will have to commit to mortgage repayment will be sky-high.
According to data from Nationwide, mortgage payments have already increased relative to pay. In the second quarter of the year, they increased to 32% compared to 27% in the third quarter of 2020.