The Bank of England’s interest rate increase in December last year has started to filter through to the UK mortgage market, with experts warning it could deter new buyers – and ease competition for the limited property available.
“Overall, average fixed mortgage rates have been creeping upwards in recent months, so although these remain relatively low when considered in the scheme of things, with the potential for the Bank of England to apply further increases to the base rate in the coming months there is no guarantee that the cost of borrowing on mortgages will not continue to rise,” Moneyfacts finance expert, Eleanor Williams, told Capital.com on Thursday.
“Should mortgage rates go on increasing, there may be some borrowers who decide to delay their house purchase, which could mean an easing of competition for the limited supply of property available,” she said.
New data from the January Moneyfacts UK Mortgage Trends Treasury Report, released this week, showed that two-year and five-year fixed-rate mortgages became more expensive for the third month in a row, with the cost of an average two-year fixed deal rising to 2.38% in January, up from 2.34% in December.
The average five-year fixed-rate mortgage, meanwhile, has increased from 2.64% to 2.66% month on month.
With regard to variable-rate products, the overall average rate for term tracker mortgages went up in line with the base rate hike, by 0.15% to 3.53%. The average two-year tracker rate has increased to 1.75%, although Moneyfacts said this is 0.62% lower than it was this time last year.
The average standard variable rate (the default tariff you’re moved to if you don’t remortgage when your fixed term deal comes to an end) is 4.41%, a slight increase from December.
However, average rates for those with the smallest 5% deposits have been falling and are currently at a record low, Eleanor Williams highlighted to Capital.com.
“It may be that, following the end of the Stamp Duty holiday, which had kept the property market buoyant for much of 2021, providers are now focusing on enticing first-time buyer business, which has often been considered the life blood of the housing market,” she said.
Despite mortgage rates increasing, product availability as a whole has improved.
The report said 5,394 fixed and variable rate products were on offer, up from 5,315 in December last year.
“This is the highest level of total product choice seen in the past 13 years,” Moneyfacts said.
Moreover, finance expert at Moneyfacts, Eleanor Williams, said there are still opportunities for homeowners to get a better deal.
“With the potential for the Bank of England to apply further increases to the base rate in the coming months, there is no guarantee that the cost of borrowing on mortgages will not continue to rise overall,” she said.
“As the threat of rising inflation and potential for the cost of living to continue to rise and squeeze household budgets even more, there may be borrowers prompted to act sooner than perhaps they might have planned to in considering securing a new mortgage deal,” Williams added.
First-time buyer concerns
However, David O’Leary, policy director at the Home Builders Federation (HBF), told Capital.com that there is still a shortage of loan-to-value (LTV) products – as well as other obstacles to overcome for those who want to get on the property ladder.
“The combination of a lack of high loan-to-value products and affordability stress-testing requirements has already created a significant challenge for first-time buyers. It has been tough, even in a super-low interest rate environment.
“As rates rise and the Help to Buy scheme closes, we hope to see mortgage lenders return to sensible LTVs and take a proper look at the offers available to creditworthy homebuyers purchasing the most energy-efficient new homes available,” O’Leary said.
He noted that owners of new builds save hundreds of pounds per year on their energy bills and have generally lower running costs but see little benefit from these factors when they consider their mortgage options.
Housing sector shares dip
More widely, housing sector stock has suffered this week after the UK government recently ordered house builders to help remove dangerous cladding from buildings following 2017’s deadly fire in the Grenfell Tower in London.
The cladding replacement charges are expected to cost housing developers around £4bn ($5.4bn, €4.8bn) to help carry out the work required.
On the FTSE 100 on Thursday morning, Persimmon was the worst performer, down 3.5%, amid the sector concerns pertaining to cladding costs.
On the FTSE 250, Countryside Properties was the worst performer, down 17%, after the housebuilder said its chief executive, Iain McPherson, was stepping down with immediate effect by mutual agreement.
Moreover, the UK housebuilding company said trading in the first quarter of its new financial year has been below the board’s expectations.
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