Mortgage rates hit 15-year high: what it means for first-time buyers and homeowners
Mortgage rates have reached a 15-year high after the average cost of a two-year fix surpassed the level seen in the aftermath of last year's mini-budget.
It is yet another grim milestone for homeowners and first-time buyers who now face the highest mortgage costs since August 2008.
Here, Which? looks at why rates have shot up and the impact on first-time buyers trying to get on the property ladder and homeowners coming up to remortgage.
Mortgage rates hit a new peak
As of today (Tuesday 11 July), the average two-year fix is 6.66% and the average five-year term is 6.17%, according to Moneyfacts.
The typical two-year rate is now higher than what we saw in the aftermath of the mini-budget during Liz Truss' short-lived tenure as prime minister.
On 20 October last year, the average two-year rate peaked at 6.65%, before falling the following day. Today's figure is the highest it has been for 15 years, and is expected to keep increasing in the coming weeks.
The current cost of a five-year fix is still below the highs of last autumn when the average came in at 6.51%.
Why are mortgage rates increasing?
Interest rates are highly dependent on the Bank of England base rate, which has been hiked 13 times in a row since the end of 2021.
The Bank has continually increased the rate (currently 5%) in a bid to calm inflation, which stands at 8.7%. The government hopes to halve this number by the end of the year, but the overall target is 2%.
Mortgage providers have significantly increased their rates as a result. Experts believe further base rate hikes are on the way this year, so mortgage costs are also expected to continue climbing.
- Find out more: the Bank of England base rate and your mortgage
How will higher rates impact mortgage repayments?
Mortgage costs are drastically different from where they were only 12 months ago.
In July 2022, the average two-year fix was 3.74%, and in 2021 it was 2.55%. That's almost a third of the current figure.
The table below shows what difference surging rates have had on monthly mortgage repayments for different borrowing levels. The figures are based on a 25-year repayment term.
| Mortgage amount | Monthly payments July 2021 (2.55%) | Monthly payments July 2023 (6.66%) | Difference |
|---|---|---|---|
| £100,000 | £451 | £685 | +£234 |
| £150,000 | £677 | £1,028 | +£351 |
| £200,000 | £902 | £1,370 | +£468 |
| £250,000 | £1,128 | £1,713 | +£585 |
| £300,000 | £1,353 | £2,056 | +£703 |
| £400,000 | £1,805 | £2,741 | +£936 |
- Find out more: use our mortgage repayment calculator to check how rate rises will impact you're ability to repay a mortgage. You can also browse our full list of mortgage calculators for more help crunching the numbers.
Homeowners: what will higher rates mean for you?
Around 80% of mortgage holders are on fixed-term deals, meaning they will not feel the effects of the price rises until their existing deal comes to an end.
But that impact when they come to remortgage will likely be huge, as the majority of households will be coming off deals set at interest of around 2%.
Around 2.4 million fixed-rate mortgages are due to end between now and the end of 2024, according to figures from trade association UK Finance.
A new mortgage relief charter signed by 85% of UK lenders has cemented support pledges from banks and building societies to help those who struggle to pay their bills.
Best remortgaging rates up to 90% loan-to-value
The cheapest mortgage rates tend to be available at up to 60% loan-to-value (LTV), meaning they're only on offer to people with a lot of equity in their home.
Rates are high compared with previous years, but you'd still be significantly better off not lapsing on to your lender's standard variable rate.
The table below shows the best rates available on two-year and five-year fixes at four popular LTV levels.
| Loan-to-value (LTV) | Cheapest two-year fix | Cheapest five-year fix |
|---|---|---|
| 60% | 5.64% (First Direct) | 5.16% (First Direct) |
| 75% | 5.69% (First Direct) | 5.23% (First Direct) |
| 85% | 5.78% (First Direct) | 5.27% (First Direct) |
| 90% | 5.88% (First Direct) | 5.78% (First Direct) |
Source: Moneyfacts. Rates correct as of 11 July 2023. Remortgaging deals only. First Direct deals come with a £490 fee.
- Find out more: tips on finding the best deal when remortgaging
First-time buyers: what will higher rates mean for you?
There is no denying the fact higher rates will result in bigger mortgage repayment costs for those trying to get on the housing ladder and this could impact how much you are realistically able to borrow.
But while the price of higher LTV amounts (such as 90% and 95%) have been on an upward trajectory in recent months, they've been rising at a slower rate than lower LTVs (i.e. 60%).
Best first-time buyer rates up to 95% loan-to-value
First-time buyers traditionally take out mortgages with higher LTVs as they do not have the funds to save for a bigger deposit, so we've listed the deals at 85%- 95% LTV.
| Loan-to-value (LTV) | Cheapest two-year fix | Cheapest five-year fix |
|---|---|---|
| 85% | 5.78% (First Direct) | 5.27% (First Direct) |
| 90% | 5.86% (NatWest) | 5.39% (First Direct) |
| 95% | 6.04% (Cambridge Building Society) | 5.78% (First Direct) |
Source: Moneyfacts. Rates correct as of 11 July 2023. First-time buyer deals only. First Direct deals come with a £490 fee, the NatWest deal has a £995 fee and the Cambridge Building Society deal has £599 fee.
The impact on house prices
In positive news for first-time buyers, house prices have slipped from their peak and high mortgage rates are expected to keep contributing to further price drops.
According to Halifax, prices in June fell at their fastest annual pace (-2.6%) since 2011. A drastic slump, however, will be needed in order to bring prices back to pre-pandemic levels.
The average deposit put down by first-time buyers outside of London last year was £44,100, according to Halifax.
To see how prices differ region-to-region, check out our story on what's happening to house prices.
