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Around 700,000 British households face a jump in mortgage costs when their fixed-rate contracts expire in 2025, as turmoil in UK financial markets in recent weeks threatens to drive borrowing costs higher.
Mortgage rates were expected to fall this year, easing the pain for homeowners. But the latest sales in the UK government debt marketsdriven by concerns about persistent inflation and excessive borrowing by the public, could keep borrowing costs high for a long time.
That change has caused exchange rates, which are closely watched by lenders to set the prices of their mortgages, to rise sharply.
The two-year interest rate swap, which measures the average interest rate over 24 months, rose from just under 4 percent in mid-September to more than 4.5 percent.
The mortgage shock in store for families this year comes with more than 2.4mn households due to take out a higher mortgage in 2023 and 2024, according to analysis by property group Savills.
Lucian Cook, head of residential research at Savills, said the “pressure on housing finance” from higher borrowing costs “has the effect of continuing to absorb money the economy“.
Most UK homeowners are fixing their mortgage rate for two or five years, meaning the shock of a big rise in borrowing costs starting in 2022 – and rising after Liz Truss's “Small Budget” – hit households for several years. .
Rising mortgage payments have been a major contributor to the cost of living crisis. Higher interest rates will add £1.27bn to annual housing costs for homeowners refinancing by 2025, Savills projects.
This estimate is based on a forecast that predicts that mortgage rates will drop to 4.0 percent by the end of the year.
But investors have grown increasingly concerned about government debt, sticky inflation and the outlook for the UK economy, which in recent weeks has pushed up government borrowing costs and exchange rates.
Simon Gammon, managing partner at Knight Frank Finance, said: “The transition has gone materially so pricing pressure is already there for all lenders. . . if the current situation continues with constant high volatility, we will see mortgage rates rise across the board. ”
The Bank of England, which last year began cutting interest rates from 16-year highs, warned that “the full impact of higher interest rates has not yet passed on to all depositors”.
The central bank said in November that the average home owner who reaches the end of the fixed rate in the next two years will see their monthly payments increase by 22 percent, or £146.
The share of households in arrears or defaults on mortgage payments remains low by historical standards, the BoE added.
The need to afford higher costs has led many homeowners to put off moving, and fewer people are able to trade up to a more expensive home.
Cook at Savills said that “only when this is fully completed . . . will you see people rethinking migration”.
There should be good news for borrowers who refinance on two-year fixed-term contracts, however. They have settled near the recent peak of borrowing costs and will mostly see their monthly costs fall.
Of the more than 1mn fixed-price deals that expire in 2025, another 340,000 will be two-year fixes where borrowers typically save money by borrowing money. Some were long-term repairs where borrowing would be too expensive, Savills said.
Additional reporting by Ian Smith