While many households within the UK will have a fixed rate mortgage, the majority of these would vary between a 2-, 3- or 5-year period.
The UK mortgage market had seen an unprecedented period of low inflation, a historically low Bank of England base rate and a market in which lenders had access to cheap funds to fuel short-term fixed rate borrowing.
There has been a steady increase in inflation figures since the end of 2021, as global markets and demand started to return to normal following the pandemic and the War in Ukraine.
As a result of markets pricing in a higher base rate over the next five years, this has impacted the traditional short term 5-year or less fixed rate deals many homeowners will be accustomed to, now the appetite for longer-term fixed rate increases amid expectations we will be in a period of higher inflation and higher interest rates.
While we have seen certain lenders such as Kensington and Habito offer long-term fixed rates to allow homeowners access to higher income multiples, the interest rates associated with these deals were always considerably higher which never made it attractive to homeowners.
As we head into a period of average 5-year or less fixed rates starting with 5% or 6%, this made longer-term fixed rates considerably more desirable.
Moving forward, as we see new lenders coming onto the market such as Perenna, and other fintech lenders with new funding models and longer-term fixed rates this will no doubt disrupt the traditional lender’s product offering, as we face a new era joining our European and US counterparts in taking up longer term deals.
Any indication of when fixed rates may start to fall again?
My worry is that things may well get worse before they get better, while we expect inflation figures to come down the anticipation will be in line with market forecasts. If not, markets will be pricing in higher base rates over a longer period of time.
We also have the MPC meeting on Thursday which will also play a part in market reaction following the governors’ comments.
Markets need stability and a positive outlook for the future, once we have this in our sights this is when we will see swaps reduce and start to see fixed rate pricing come down.
Homeowners need to understand that sub-2 % rates aren’t the norm and should not be used as a benchmark of where rates will return to in the future.
A mortgage is a long-term commitment which ultimately means you must take the rough with the smooth.
Nick Mendes is mortgage technical manager at John Charcol
