Mortgage borrowers face a new wave of rate rises

Mortgage lenders took interest rates on home loans to new highs following turmoil on financial markets, deepening the affordability crunch facing borrowers and adding to gloom over the prospects for the housing market.

Rates on two-year fixed rate mortgages hit 6.46 per cent on Wednesday, with five-year rates reaching 6.32 per cent, the highest level since the financial crisis, according to data provider Moneyfacts.

Barclays raised rates on fixed-rate home loans by 0.8 percentage points on Wednesday; its 10-year fixed rate deal, for example, rose from 4.85 to 5.65 per cent for borrowers with a large deposit of 40 per cent or more. This followed increases on Monday of up to 1.29 percentage points by Halifax.

Rate rises among lenders have accelerated since chancellor Kwasi Kwarteng’s “mini” Budget in late September sent gilt yields soaring. The Bank of England has looked to bring stability to markets with an initiative to buy gilts but this week bond markets and sterling suffered fresh bouts of volatility.

Gilt yields influence swap markets, which lenders use to price their fixed-rate loans. Ray Boulger of mortgage broker John Charcol said banks were reacting to bond market moves.

“Lenders have got to price on the cost of funds and make a difficult decision on when to buy funds in the money market,” he said. “If they buy fixed-rate money at the wrong time, they’ll have to offer mortgages on a smaller margin to get rid of them. Ultimately, the uncertainty is making many of them cautious.”

TSB on Wednesday increased its rates on fixed-term mortgages by up to 0.55 percentage points, and Metro Bank told brokers it was withdrawing all loans above 80 per cent loan-to-value for residential borrowers; and those above 75 per cent LTV for buy-to-let.

Hinckley & Rugby Building Society paused all new applications for mortgages, citing “an ongoing period of very high demand, which is now putting our service under pressure”.

Rocketing mortgage rates have left some homeowners facing big rises in costs at the same time as the prices of fuel, food and other domestic basics have been rising rapidly.

Aaron Strutt of broker Trinity Financial said: “Many borrowers are facing huge and often unaffordable increases in their monthly repayments and they are worried. Lots of homeowners will not be able to remortgage away to another lender so they will have to stick with their existing providers.”

The mortgage crunch is weighing on the wider housing market, according to the latest survey of the UK residential market from the Royal Institution of Chartered Surveyors (Rics), which found inquiries by new buyers dropped for the fifth successive month in September, along with fewer homes coming on for sale at estate agents.

It said any market boost driven by a reduction in stamp duty announced by Kwarteng in his “mini” Budget would be outweighed by expected rises in mortgage rates over the coming six months. House prices had thus far been “propped up” by falling stock levels, but the negative mood among agents had sharpened in recent weeks.

Simon Rubinsohn, Rics chief economist, said much depended on the state of the mortgage market when the current period of turbulence subsides, “but it is difficult not to envisage further pressure on the housing sector as the economy adjusts to higher interest rates and the tight labour market begins to reverse.

“For now, mortgage arrears and possessions remain at historic lows but they are inevitably going to move upwards over the next year, as pressure on homeowners grows,” he said.