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Mortgage rates to rise, house prices to fall

Five-year mortgage rates are set to rise by half a percentage point over the next six months as mortgage lenders withdraw their best rates and experts warn house prices could now start to fall.

It comes as the Bank of England raised the base rate to 0.5 per cent today – the first time in more than 10 years interest rates have gone up.

Off the back of it, mortgage lenders are expected to hike rates and pull their cheapest deals, resulting in experts warning there could be a knock-on effect on house prices. 

Bank of England governor Mark Carney announced base rate will rise to 0.5 per cent today

In fact Metro Bank pre-empted the Bank of England and announced this morning that it’s pulling its five-year deals at 75 per cent loan-to-value from tomorrow at 5.30pm.

The latest data from Moneyfacts shows nearly half of all lenders have withdrawn at least one of their cheapest rates in the past month.

The cheapest two year-fixed mortgage for homebuyers or movers with a 25 per cent deposit or equity stake at the start of October was 0.99 per cent with a £1,495 fee from Yorkshire Building Society. Today the cheapest rate for the same borrower is now a 1.13 per cent rate with a £1,495 fee. 

On a £100,000 mortgage, over 25 years monthly payments on the 0.99 per cent deal come in at £376.42. On the same mortgage at 1.13 per cent, payments jump to £382.79 a month – just £6.37 more a month.

Five-year deals are also getting more expensive. In the past month, Barclays has shelved its 1.75 per cent five-year fix up to 75 per cent LTV and brought out a 1.95 per cent deal.

NatWest, meanwhile, hiked rates across both two-year and five-year deals by up to 0.2 per cent a week ago. AA Mortgages, Skipton Building Society and Accord Mortgages have also raised rates or withdrawn products altogether in the past fortnight.

Five-year mortgage rates are currently still available at less than 2 per cent, but Samuel Tombs, chief UK economist at Pantheon Macroeconomics, is predicting that average rates will jump by around 0.5 percentage points early next year when a critical Bank of England funding scheme will close its doors in February.

The Term Funding Scheme allows banks to borrow money from the Bank of England far more cheaply than they can on the money markets so long as they can prove the money they borrow is lent back out to households and businesses.

In August, the Bank of England confirmed the scheme would wind down next February, raising the possibility that lenders will pass on higher costs to borrowers.

Now, there is also a higher base rate to factor into the cost of mortgages too.  

Tombs said: ‘The average quoted rate on a five-year fixed-rate mortgage fell to a record low of 1.90 per cent in September, from 1.96 per cent in August. 

‘We expect October data to show that the five-year rate jumped to 2 per cent, given that several high street banks recently have shunted up their rates.’ 

House price growth will slow 

He added that borrowers should expect mortgage rates to ‘rise sharply’ in March, adding: ‘Mortgage terms, however, will continue to lengthen, ensuring house prices stabilise, rather than fall, in 2018.’

In the past, growth in house prices has slowed by around eight percentage points when mortgage rates have risen by half a per cent. 

Tombs said: ‘With most measures of year-on-year growth in house prices currently running between 2 per cent and 5 per cent, this might be enough to push house prices down next year.’

 Mortgage rates likely will rise sharply in March

However, he said homeowners could mitigate the effect of a rise in mortgage rates by lengthening the term of their loan.  

The proportion of mortgage lending with a term of 30 years or longer has increased steadily, reaching 35 per cent this year from just 18 per cent in 2010. 

A further two-year increase in the average mortgage term would be enough to offset the impact of a 50bp rise in mortgage rates on monthly interest repayments.

Tombs added: ‘Households have scope to sacrifice other expenditure in order to take out larger mortgages and secure home purchases.

‘Accordingly, we look for house prices to stabilise next year, rather than fall outright. This is, nonetheless, a downward revision from our prior expectation of a 2 per cent gain in prices.’ 

>> How to find a cheaper (and better) mortgage in eight easy steps

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This mortgage payment calculator will allow you to see the effect of sneaky arrangement fees on your repayments. Use the second part of the calculator to compare deals.

Read more at DailyMail.co.uk


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