Mortgage Rates Jump High in December Harming End of Year Targets

Mortgage rates have seen significant changes recently, leaving many homeowners in the UK navigating an unpredictable market. 

The average rates for fixed-term mortgages, particularly two-year fixed options, have increased this December, following fluctuations in recent months. The changes reflect broader economic conditions, including inflation and interest rate decisions by the Bank of England.

In December, the average rate for two-year fixed mortgages rose to levels above 5.5%, slightly higher than the previous months, following earlier dips in rates. Homeowners with tracker and variable-rate mortgages are also facing higher costs as base rates have climbed. For instance, the Bank of England’s base rate currently stands at 5.25%, with expectations of further increases​

This rise in mortgage rates means higher monthly payments for many borrowers. Homeowners who secured fixed-rate deals during periods of lower interest rates are now approaching the end of their terms and may face considerable increases in their repayment costs when they remortgage. 

For instance, a mortgage holder coming off a 2% fixed rate could see their new rate more than double, impacting household budgets​.

Frank Clarke of Octagon Capital commented:

“The new budget and government were intended to help households and help people get on the ladder and not make it more dear. This makes it hard for firms and brokers to hit end of year targets when a lot of customers are price sensitive. We can only hope that inflation and base rates will reduce and make up for the sluggish end to the year for new mortgage approvals.”

Rachel Springall of Business MoneyFacts commented:

“Borrowers will hope that mortgage rates will drop next year, and while there is speculation over multiple cuts to the Bank of England base rate, stubborn inflation can delay such decisions. In addition, the present market proves that a base-rate cut does not always mean fixed mortgage rates will immediately fall if there are other economic challenges in play for lenders to consider.”

David Beard of Lending Expert commented:

“Anyone looking for a new mortgage or remortgage needs to stay informed and proactive. Securing a new fixed-term rate in advance can help offset potential increases. Some lenders allow customers to lock in rates months before their current deals expire. But borrowers should also be prepared for higher rates and how to cover these.”

Inflation plays a crucial role in these trends. Despite earlier expectations for it to decline, inflation has remained above 10% for several months, influencing interest rate decisions. This persistence in high inflation adds uncertainty to the mortgage market, as lenders adjust rates to reflect economic realities​

For those entering the housing market, affordability remains a challenge. Skyrocketing housing costs, coupled with higher borrowing rates, have strained budgets, particularly in regions like London, where costs are already high. Reports show that many Londoners struggle with housing affordability, emphasizing the need for careful planning in mortgage decisions​

Navigating this environment requires vigilance. Borrowers are encouraged to compare rates across lenders and seek financial advice tailored to their situations. Proactive measures, like locking in rates and budgeting for potential increases, can mitigate the impact of these changes while providing some stability in a volatile market.