Borrowers hoping to fix their mortgage payments for five years can now expect to pay an average rate of 6 per cent as banks have rapidly increased the cost of longer-term loans.
Five-year fixed rates have jumped sharply in response to expectations that interest rates will be considerably higher in the future. But brokers said the rapid increases also reflected banks’ unwillingness to take on new lending.
Fixed mortgage rates have been popular in recent months as borrowers have sought security amid the uncertain economic environment. The average five-year fixed rate has jumped by almost half a percentage point in the past month, according to Moneyfacts.co.uk.
Ray Boulger at John Charcol, the mortgage broker, said that every lender had increased its fixed rates in recent weeks. But while these rises initially reflected a jump in underlying swap rates, which determine the cost of banks’ funds, he noted that rates had continued to rise even though swap rates have eased in the past two weeks.
“This signals that lenders have not got enough money to lend and are curtailing demand by putting rates up,” said Boulger. “Once one lender puts rates up, then others quickly follow.”
Research from Moneyfacts.co.uk found that the average five-year fixed rate had risen to 6 per cent. Two-year fixed rates remain slightly cheaper, although these have also jumped in recent weeks.
The rate increases come as banks are also taking a dimmer view of lending to customers relying on bonuses and those needing to take out large loans.
The Royal Bank of Scotland, for example, has considerably tightened its criteria on bonuses. The bank will now only consider 25 per cent of a customer’s average bonus over the past two years, rather than 50 per cent previously. It will also now exclude any part of the bonus that is not paid in cash – such as deferred stock and share options – and any that could be clawed back later.
Borrowers needing mortgages of £1m or more, who may have to take their loan out through a private bank, are also having to pay larger arrangement fees and higher margins over the base rate.
Melanie Bien at Savills Private Finance said these changes were a clear signal that lenders were not relaxing their criteria.
Some of the big high street lenders are still offering five-year fixed rates closer to 5 per cent but brokers said these may be short-lived if demand continues to be strong. The best rates are still reserved for those with large deposits or significant equity in their home.
The best five-year deals include a rate of 5.29 per cent, which is being offered by Abbey, Northern Rock and Woolwich, to customers with deposits of between 25 and 35 per cent. HSBC has a five-year rate of 5.24 per cent for existing customers or 5.39 per cent for people switching their mortgage to the bank. Halifax and Nationwide, meanwhile, are charging more than 6 per cent for five-year fixed rates.
Most of the best two-year rates are now around 3.5-4 per cent. Borrowers had a fairly wide choice of two-year rates below 3 per cent until a few weeks ago.
Brokers had been signalling to borrowers who are on variable rates that now could be a good time to lock into a guaranteed fixed rate for a number of years. But the recent rate changes mean these borrowers may now be better off staying where they are.
“Borrowers who are on a very cheap tracker rate or standard variable rate may wish to stay put for now and enjoy cheaper payments for a while longer,” said Bien.
Most forecasters believe interest rates will not rise until at least the end of this year, while some economists predict they could remain low for much longer.
Boulger said the fixed deals now on offer have already priced in considerable rises to the base rate, and if this failed to happen as quickly as expected, they could end up looking expensive in a few years’ time.
