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UK homeowners and first-time buyers warned to brace for 5%-plus mortgage rates

Households looking for a new mortgage deal have been warned to expect 5%-plus fixed-rate deals in the coming weeks, after Wednesday’s inflation figures sent the money markets back into turmoil.

Nick Mendes, the mortgage technical manager at the broker John Charcol, said on Thursday that he doubts that there will be any two-year fixed-rate mortgages and probably few five-year deals priced at less than 5% in the coming weeks, as lenders are forced to reprice their mortgages upwards.

Within hours of his comments, one of the UK’s biggest lenders, the Nationwide, said it was increasing selected fixed and tracker rates by up to 0.45%, from Friday.

The prospect of 5% mortgages would be a further blow to potential first-time buyers and households hoping to remortgage their existing deal. It is the latest turn in what is fast becoming a year of mortgage turmoil.

A household with an expiring 2.99% deal on a £150,000 mortgage would have to find an extra £175 a month or £2,100 a year if the replacement was priced at 5.19% – on top of recent food price increases of nearly 20%.

The publication on Wednesday of April’s annual inflation figure of 8.7% – which was higher than expected – prompted a sharp sell-off on the London stock market, raised the prospect of a 13th interest rate rise by the Bank of England, and pushed swap rates further upwards. The cost of fixed-rate mortgages are largely determined by the swap rates paid by lenders.

“In the current economic environment swap rates have continued to fluctuate and, more recently, increase, leading to rate rises across the market. This change will ensure our mortgage rates remain sustainable,” a Nationwide spokesperson said.

With Britain likely to experience a long period of high inflation and weak growth – dubbed stagflation – investors sold UK government bonds, or gilts, depressing the price and raising the interest rate.

Shifts in bonds typically feed through into swap rates, which lenders use to guide their mortgage pricing decisions.

After Liz Truss’s disastrous mini-budget in September last year, the yield, or interest rate, on a two-year government bond rose to 4.7%, pushing two-year fixed rate mortgages above 5%.

The yield rose as high as 4.478% on Thursday, up on the 4.35% rate the day before, and from 4% at the end of last week.

“The market is now factoring in higher interest rate peaks and this will soon be reflected in fixed rate mortgage pricing. Gilt (government bond) yields have therefore shot up [today],” Mendes said.

“When lenders have used up funds already bought I doubt there will be any rates available significantly below 5%. Anyone waiting to see what happens to mortgage rates following the recent announcement should look to get their mortgage application under way,” he added.

David Hollingworth of L&C Mortgages said it was too early to say definitively what will happen to fixed rates, but said the direction of travel is “very much upwards” at the moment.

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“Until recently there were plenty of five-year-fixed rate mortgages at or around the 4% figure, now they are mostly all gone.”

Within hours of Wednesday’s inflation figure being published, two buy-to-let lenders pulled their mortgage products before a repricing upwards. Lloyds/Halifax increased the cost of its fixed rate mortgage by 0.2%, and a number of other lenders withdrew their 10-year deals the day before.

Uswitch’s mortgage expert, Claire Flynn, said the average two-year fixed-rate mortgage (75% loan to value) has risen by 0.25% to 5.6% over the last week alone.

Every increase to mortgage rates adds further misery to people trying to buy a home, particularly first-time buyers. One reader told the Guardian that in mid-April they were being offered a two-year fix with Virgin Money at 4.24%. Having had an offer accepted on a house, they were told on Tuesday that the rate had risen to 4.54%.

Despite the gloomy figures, Mark Harris, the chief executive of the mortgage broker SPF Private Clients, said higher rates were not a done deal.

“Fixed-rate mortgage pricing had already been rising with a number of lenders repricing recently or giving a heads up that they intend to do so. Santander and Halifax are just two lenders who have recently increased their rates and others are likely to follow suit, with short notice,” Harris said.

“The markets’ assessment of where interest rates are heading has been consistently wrong over the past nine months. Swaps can be extremely volatile and this is likely to be a kneejerk reaction before they settle down. My advice would be to wait a few days for the markets to settle and then hopefully we will have a better picture.”

Things may be chaotic for homebuyers, but they still have some way to go to top the events of last autumn. The now infamous mini-budget on 23 September last year unleashed chaos in the financial markets, and helped push the price of many new fixed home loan deals above 6%.

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