Is it time to fix? UK mortgage trends and predictions

People up and down the country are feeling the strain of the cost of living crisis.

With interest rates rising sharply in a bid to curb soaring inflation, the resulting higher mortgage rates will add more pressure to the monthly budgets of millions of UK homeowners. 

To offer a helping hand here, we take a closer look at what's going on in the mortgage market, and examine how things could change in the future. 

One question you may be asking yourself right now is whether now is the right time fix your mortgage rate. Let's weigh up your options. 

What’s happening with UK interest rates?

On 22 September 2022, the Bank of England raised interest rates to 2.25 per cent, making this the seventh rise since December 2021 — when bank rates stood at just 0.1 per cent. The Guardian reported that the average two-year fixed-rate deal is now 4.09 per cent, its highest level in eight years.

Further rises are expected over the coming months, with some experts predicting that rates could hit 5 per cent as soon as next year.

The next interest rate decision will be on 3 November, and the Bank may raise rates once again.

Existing Bank rate-linked mortgages like base rate trackers mirror interest rate rises, while the cost of many new fixed-rate deals have factored them in already.  

But it’s not just climbing mortgage rates that are proving to be an issue for homeowners; anyone hoping to buy or move home are facing asking prices which are ten and a half per cent higher than a mere 12 months ago, according to Halifax’s latest house price report.  

While the government's decision to slash stamp duty rates will bring some comfort for housebuyers concerned about affordability, rising interest rates present a bigger obstacle.

Learn more: what to do if you can't remortage due to affordability

Fixed-rate mortgages

Mortgage brokers have noted the increasing number of homeowners opting for longer-term fixed-rate mortgages, in an attempt to try and ensure stability in their home finances. 

And yes, borrowers did tend to pay more to fix in for longer historically, but the price gap is closing, and so fixed-rate mortgages really are worth exploring. 

In fact, long-term mortgage deals are very competitive at the moment – with only 0.45 per cent interest separating a two-year fix from a ten-year fix.  

And as we previously mentioned, with interest rates likely to rise again November, it may be best for buyers to think long-term when selecting their mortgage deals. 

Why are interest rates rising?

The Bank of England’s Monetary Policy Committee (MPC) uses interest rate hikes to control inflation, which is currently at a 40-year high.

These changes reflect the uncertainty around the war in Ukraine, as well as the UK’s energy price cap, which climbed by 54 per cent in April to £1,971 and would've hit household finances even harder this autumn if it weren't for government intervention. 

Mortgage rate predictions for the next 5 years

When interest rates go up, so do mortgage rates.

The average rate on a five-year fixed mortgage rate is forecast to rise by 0.3 per cent this year, rising further to just over one per cent next year, and over two per cent in 2024. 

And with the Bank of England’s Monetary Policy Committee set to meet again on 3 November, this is predicted to increase, but more slowly than the market consensus. 

Earlier this year, the Financial Conduct Authority (FCA) said it expects an average base rate of three per cent, with a range between two and a half and four per cent, meaning the cost of borrowing money will be higher as banks inevitably pass on their costs to customers.  

Inflation is expected to drop in future years, which means borrowers could face even higher repayments should they renew their loans. 

But homeowners who have been struggling to pay off their mortgages may feel some relief. One mortgage rate forecast is that lenders are expected to offer lower interest rates on new deals, so borrowers may be able to afford larger loans than before. 

Borrowers will fix for longer

When taking a closer look at mortgages in 2021, it’s interesting to note that more borrowers took out plans stretching longer than the typical 25 years. And although this increases interest, homeowners will find that their monthly payments are significantly less.  

If you think that’s a good thing to consider, Habito launched a 40-year fixed-term plan with no exit fees back in March. 

The industry can expect to see more borrowers opting for longer fixed-term plans if interest rates continue to rise as they do.  

Should you fix your mortgage for 2, 3, 5, 10 years — or longer?

If you have a low loan-to-value (the size of your mortgage as a percentage of your property value) then you will almost certainly benefit from fixing, as you will be able to secure a low fixed-interest rate.  

Now, of course, the longer your fixed term, the longer you are locked into a lower interest rate. And although there is no limit to how many times you can remortgage, if you decide on a long fixed-term period, there will likely be exit penalties and early redemption fees if you want to repay your mortgage or move.  

These factors need to be traded off against the cost of exiting your current deal (which forms part of the overall cost of remortgaging) and the certainty that a fixed-term mortgage provides. 

Longer-term fixed-rate mortgage deals are a recent development in the mortgage market, with some providers even offering up to a 40-year fixed-rate mortgage.

These have a higher rate but offer certainty and stability over the amount you will pay long-term. And these longer mortgages also remove the effort and cost of needing to remortgage every few years.  

Fixed-rate versus variable mortgage

As the name suggests, fixed-rate mortgages ensure your interest rate is fixed, say, for five years, and when your fixed-rate period ends, you will then move onto the lender’s higher standard variable rate (SVR).  

On the flip side, if you take out a variable rate mortgage, then the interest rate would typically rise and fall at the mercy of the lender throughout the lifetime of the mortgage. But you could benefit from a lower mortgage rate, depending on the individual deal.  

Homeowners need to be diligent at the moment, and ensure that they are living within their means.  

The stamp duty reduction and recent removal of mortgage stress-testing criteria should offer some much-needed help on the affordability front.

But still, homeowners need to budget, research and do their due diligence before choosing their mortgage. 

For more relevant tips and articles straight to your inbox, sign up to our emails.

You can also get more information and tips on the rising cost of living on our cost of living hub here and the latest news on mortgage rates.

If you need expert help selecting the right mortgage for your individual circumstances, click below to connect with a regulated mortgage adviser.