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Borrowers can now fix a mortgage at a lower rate over five years than two, as financial markets bet that UK interest rates will be higher in the short term in the wake of the Iran war.
The average two-year fix this week rose from 4.83 per cent at the start of March to 5.56 per cent, while five-year fixes are 5.54 per cent on average, up from 4.95 per cent, according to finance site Moneyfacts.
Mortgage lenders are struggling to price their fixed-rate deals under rapidly changing market conditions, with several pulling all of their fixed-rate deals on Monday and others announcing further rises in the cost of their home loans.
Virgin Money raised rates on its two-year fixes by up to 0.7 percentage points from Thursday, a large increase by recent standards. Its five-year rates will rise by as much as 0.65 percentage points. NatWest also announced rate rises across its mortgage products from Thursday. These followed increases by Halifax and Nationwide earlier in the week.
The inversion of rates for two- and five-year fixes is driven by traders’ expectations of higher official UK interest rates in the short term. Rachel Springall, finance expert at Moneyfacts, said the switched relationship was unusual, but was likely to persist as long as markets remained highly volatile.
“This abnormality happened after the fallout from the mini-Budget, and it took around three years for the inversion to end,” Springall said.
Moneyfacts said lenders had withdrawn more than 1,500 of their products since the beginning of March, leaving just under 6,000.
“Seeking advice will be essential right now, but even brokers are rushed off their feet trying to keep on top of the mortgage mayhem,” Springall said.
Swap rates, which lenders use to guide their pricing of fixed-rate mortgages, fell back on Monday on news of a possible peace deal in the Middle East, and have steadied in the days after. But their increased volatility since the start of the Middle East conflict has forced lenders to make rapid and substantial changes in mortgage rates, sometimes with immediate effect.
Customers’ eagerness to lock in a rate before it goes up is another factor driving lenders towards higher rates — or withdrawing their fixed rates entirely. Andrew Montlake, managing director of broker Coreco, said: “The big issue for lenders is demand. Our business this month [as a broker] is extraordinary because the next two or three months of business has been brought forward. Lenders will have been annihilated with applications.”
Activity in the broader housing market has yet to show evidence of a marked shift in sentiment. Tom Bill, head of UK residential research at estate agent Knight Frank, said that while the market will not come to a “screeching halt”, the effects from the rise in mortgage rates will “trickle through the market over the next few months”.
He predicts a “brake on transaction activity” for those new to the market.
“Things are much more difficult and expensive than they were three weeks ago,” he warned. He anticipates that people will delay buying and selling until conditions are clearer and cheaper. “If you can wait, you’ll wait,” he said.