UK mortgage costs pass mini-Budget highs

Receive free Mortgages updates

We’ll send you a myFT Daily Digest email rounding up the latest Mortgages news every morning.

The cost of two-year fixed rate mortgages in the UK has surpassed the highs reached in the wake of last autumn’s “mini” Budget, as banks and building societies push up prices in response to interest rate increases.

Lenders have responded to rising interest rates and expectations of further tightening by ratcheting up the cost of borrowing, with the average rate on a two-year fixed mortgage hitting 6.66 per cent on Tuesday, according to data provider Moneyfacts. That is the highest level since 2008.

Two-year fixed rate mortgages previously peaked at 6.65 per cent on October 20 last year, after the unfunded tax cuts in then prime minister Liz Truss’s “mini” Budget triggered intense market volatility.

The latest peak will pile greater pressure on thousands of homeowners and prospective buyers already squeezed by the higher cost of living, despite a “mortgage charter” signed by chancellor Jeremy Hunt and lenders last month to help borrowers facing financial hardship.

Rachel Springall, finance expert at Moneyfacts, said that although consumers could still find some competitive deals, “borrowers concerned over affordability of a deal might pause their home ownership plans, or indeed park the idea of refinancing”.

HSBC, TSB and Lloyds Bank were among the lenders to increase rates on some products on Monday. Barclays and NatWest told intermediaries on Tuesday that they would be increasing rates on some of their mortgages on Wednesday.

The rise in borrowing costs came as MPs questioned mortgage lenders on consumer behaviour following recent rate rises, mortgage affordability and availability, and the impact on house prices.

Andrew Asaam, homes director at Lloyds Banking Group, the UK’s largest mortgage provider, told the House of Commons Treasury select committee that households were “undoubtedly . . . feeling the effects of not just rates increasing but also the wider cost of living crisis”.

But he added that consumers had so far been able to manage higher costs because unemployment remained low, with arrears below pre-Covid levels.

Henry Jordan, home commercial director at Nationwide, the UK’s second largest mortgage provider, said customers starting new mortgages faced an average increase of £235 a month.

High mortgage rates contributed to UK house prices falling last month at the fastest annual pace since 2011, according to Halifax data. The average property price declined 2.6 per cent in June compared with the same month in 2022, and was more than double the drop of 1.1 per cent in May.

Although repossessions remain at historically low levels, the government last month announced a mortgage charter aimed at helping households squeezed by the cost of repayments.

Measures include lenders waiting at least 12 months before repossessing the homes of borrowers who fall behind on payments, and a commitment to allow borrowers temporarily to lengthen mortgage terms without affecting their credit ratings.

Charlotte Harrison, interim chief executive for home financing at Skipton Building Society, told the Treasury select committee that uptake of the measures had “been more driven by life events rather than the rate environment”. But she added that the increase in rates would probably lead to “an uplift in customers choosing these options”.

The Bank of England lifted interest rates to a 15-year high of 5 per cent last month, and investors predict that they will reach 6.5 per cent by next March, the highest level since 1998.

Stubbornly high inflation of 8.7 per cent is stoking bets that the BoE will raise rates further, with two-thirds of economists polled by Reuters forecasting a half-point rise at the central bank’s next meeting in August.

BoE governor Andrew Bailey and UK chancellor Jeremy Hunt on Monday reiterated their call for wage restraint, arguing that pay increases, which hit a record high in the three months to May, were making it harder to bring down inflation.