Mortgage rates have reached their highest level in 15 years, surpassing the peak seen after the mini-budget.

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Yesterday (11th July 2023) it was announced that the average rate for a two-year fixed deal now stands at 6.66%, a level last seen in August 2008 during the financial crisis. The surge in mortgage costs is attributed to lenders grappling with inflation and uncertainty surrounding the interest rates set by the Bank of England.

During a hearing with the Treasury Select Committee, bank and building society leaders, including representatives from Lloyds and Nationwide, faced questions about the impact on customers. The committee examined the mortgage stress faced by borrowers, lenders’ response to repayment difficulties, and the wider effects on the UK housing market.

Today (12th July 2023), the Bank of England reported that mortgage payments will rise by at least £500 a month for nearly one million households, suggesting that many “may struggle with repayments.” 4.5 million homes have already been paying more in mortgage repayments since 2021, and higher rates are expected to hit the vast majority by the end of 2026.

The committee also explored how mortgage holders are coping with the situation. Some individuals are overpaying on their current deals, while others are considering extending their mortgage terms.

Market expectations of prolonged high inflation and interest rates in the UK, supported by data on wages and rising prices, have influenced the funding costs of mortgages. Consequently, the average two-year mortgage rate has surpassed the peak observed after the mini-budget in October 2022, during Liz Truss’s short-lived premiership.

While the average rate on a five-year mortgage deal remains below last year’s peak, currently standing at 6.17% compared to 6.51%, the Bank of England has been raising its benchmark interest rate to combat persistently high inflation. Recent figures show record annual wage growth, raising concerns that inflation will remain elevated for an extended period.

The anticipation of further interest rate increases has led to higher funding costs for mortgages, prompting lenders to raise their rates for customers. Andrew Asaam, homes director at Lloyds Banking Group, informed MPs that this shift is affecting the plans of first-time buyers, who are either putting down larger deposits or purchasing smaller properties due to tighter affordability.

Approximately 2.4 million fixed-rate mortgages are set to end between now and the end of 2024, potentially resulting in higher monthly payments for those seeking new deals.

The recent surge in mortgage costs is also expected to impact renters, as landlords may increase rental prices to compensate for higher mortgage expenses. Landlords could also decide to sell properties, potentially reducing the availability of rental homes, according to the National Residential Landlords Association.

In response to the challenges faced by individuals struggling to make mortgage payments, lenders have agreed to show flexibility and avoid swift repossession of homes. Additionally, the Labour party is planning to host its own mortgage summit in the coming days to address the issue.

Phill Gill, Managing Director, PLG said, “It is astonishing that the surge in mortgage costs is only just reaching the mainstream media, this issue has been quietly brewing for some time. As homeowners struggle with increased costs, they are less inclined to sell and are opting to stay put, leading to a decreased supply of houses on the market. Consequently, we can expect supply and demand imbalances, as fewer people will be actively seeking to move. While we have witnessed slight reductions in house prices, they fall far short of the significant downturn we initially anticipated. This probably indicates that for some time to come we will see a challenging and competitive housing market. This means that although our clients are usually in a good position to purchase, many of them will need to be ultra prepared with things like court or Deputyship orders and expert reports before searching commences in earnest. “

BBC News

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