The average rate on a new five-year fixed mortgage has reached 6% for the first time in three years, according to figures reported by the BBC from financial information service Moneyfacts.
The move comes after lenders repeatedly increased selected fixed rates during September. The latest changes mean the average rate on a two-year fixed mortgage has also risen to 5.98%, while the number of fixed-rate deals priced below 5% has fallen sharply.
For people buying a home, or borrowers preparing to replace an existing fixed-rate deal, the change means mortgage pricing has become less favourable in recent weeks. It does not mean every available mortgage is priced at 6%, because averages cover a range of products, deposits and borrower circumstances. However, it shows how quickly the market can change even when a borrower is comparing similar fixed-rate products.
Sub-5% fixed deals almost disappear
Moneyfacts said that 1,494 fixed-rate mortgage deals priced below 5% were available at the start of September. By 5 October, that figure had fallen to nine. The number of sub-5% variable-rate mortgages had remained broadly stable, according to the same source.
That difference is important because fixed and variable mortgages respond to market conditions in different ways. A fixed-rate mortgage normally keeps the same interest rate until the deal ends, commonly after two or five years. A tracker or other variable-rate product can change during the term, depending on the terms of the mortgage and the rate it follows.
There is no guarantee that a variable-rate mortgage will be cheaper over the full term, and a fixed rate provides a different form of payment certainty. Borrowers comparing products need to consider the rate, fees, early repayment charges, term and how changes in payments would fit their own budget.
Our guide to tracker and fixed-rate mortgages explains the main differences between the two types of deal.
Why are lenders increasing fixed rates?
The immediate pressure described in the BBC report is higher wholesale funding costs. Moneyfacts said rising gilt yields had increased lenders’ costs, which can feed through into the pricing of fixed-rate mortgages.
The report also links the wider market uncertainty to international concern about prices, interest rates and government borrowing costs. It says the conflict involving Iran has added to economic uncertainty, while rising energy and transport costs are creating further pressure for households.
These are market influences rather than a new announcement about Bank Rate. The latest evidence supplied here does not establish that the Bank of England has changed Bank Rate today. Fixed mortgage rates can move in response to funding markets and lender competition as well as changes in the official rate.
The BBC reported that Barclays increased selected fixed rates on four occasions during September. HSBC, Lloyds Bank, Nationwide, NatWest, Santander and TSB each made three rounds of increases, according to Moneyfacts.
What could this mean for people remortgaging?
Borrowers whose fixed-rate deal is ending may need to review their options earlier than they expected. Moneyfacts said some lenders allow borrowers to secure a new rate three months before their current deal ends, while others may allow six months. The exact timing and conditions depend on the lender and product.
If a borrower does nothing when a fixed deal expires, the mortgage will usually move to the lender’s standard variable rate, although the precise terms depend on the mortgage contract. A higher rate can increase monthly payments, so checking the end date and understanding the available options is important.
Our guide on what to do when a fixed-rate mortgage is coming to an end covers the process in more detail. Borrowers should check the information provided by their lender and seek regulated advice if they need help assessing their circumstances.
What does it mean for new buyers?
Higher fixed rates can affect how much a buyer can borrow under a lender’s affordability assessment, as well as the monthly payment shown in an illustration. Lenders also take account of income, regular spending, existing credit commitments, deposit size and their own underwriting criteria.
A larger deposit may improve the range of products available, but it does not guarantee a particular rate or approval. Buyers should avoid basing their budget on a headline deal before checking whether they meet the lender’s criteria and whether the product is still available.
It is also worth remembering that an average rate is not a quote for an individual borrower. Actual pricing can vary according to loan-to-value ratio, mortgage size, term, fees and eligibility. Our guide to how rising interest rates affect your mortgage explains why the impact differs between fixed, tracker and variable-rate borrowers.
A changing market for borrowers
The latest figures show that mortgage pricing remains sensitive to movements in financial markets. The sharp reduction in sub-5% fixed deals is particularly relevant to borrowers who had been waiting for rates to stabilise before buying or remortgaging.
There is no reliable guarantee that rates will rise or fall next, so borrowers should focus on the dates, costs and risks relevant to their own mortgage rather than relying on a forecast. Anyone concerned about affordability should contact their lender promptly, especially before missing a payment.
For more guidance on switching your existing mortgage, explore our remortgage options.
