In the midst of 2024, William Dobinson secured a one-bedroom flat in Croydon, a suburb in London’s south. His timing, however, proved somewhat unfortunate. The purchase coincided with a noticeable uptick in mortgage rates, a ripple effect from the Bank of England’s (BoE) slower-than-anticipated approach to raising interest rates.
William, who works in public relations, eventually managed to secure a two-year fixed-rate mortgage at 5.18 per cent, resulting in monthly repayments of £868. He deliberately chose the shorter two-year term over the then-cheaper five-year deals.
“My reasoning was that I anticipated interest rates would eventually decrease, so I wanted the shortest possible commitment. I was hoping my monthly outgoings would drop by around £100 in the near future,” he explained.
However, fate had a different plan. William’s fixed-rate mortgage is due to end just as another surge in rates is occurring. According to data from Moneyfacts, average two-year fixed deals have climbed to 5.67 per cent, reaching their highest point since August 2024.
William, now 32, will be eligible to lock in a new rate in approximately a week – a 90-day window before his current deal with Barclays expires. Yet, with rates escalating daily, the exact rate he’ll be offered remains uncertain.
“As things stand, it appears my new rate might still be lower than my current one, but the reduction will be significantly less than I initially hoped for. And, of course, there’s no guarantee that will still be the case when I’m able to remortgage next week,” he mused.
He acknowledges that the “worst-case scenario,” should rates continue their upward trajectory, would be a modest increase in his monthly payments. Despite the current climate, William admits to a touch of “blind optimism.” He hopes that by securing a rate next week, there’s a chance rates might fall further before his current fix concludes in June, allowing him to transition to that lower deal and reduce his costs.
“It really comes down to timing,” he conceded.
William’s situation is far from unique. Figures from UK Finance reveal a significant surge in mortgage customers opting for short-term, two-year fixes back in 2024. Industry brokers confirm that many homeowners were banking on the expectation of falling rates in the subsequent years.
The Two-Year Fix Gamble
- Increased Uptake: Just under 400,000 mortgages, representing 43 per cent of the total market, were sold with a two-year term or less. This marks a notable increase from the 34 per cent observed the previous year.
- Facing Renewals: These homeowners are now approaching the end of their fixed-rate periods, and some are bracing for the possibility of facing higher interest rates upon renewal.
Aaron Strutt, Product Director at Trinity Financial, commented on the trend: “A great many homeowners were under the impression that attractive, low-cost deals would become available. Unfortunately, that hasn’t materialised as expected. The reality is that most people didn’t foresee geopolitical events, such as wars, having such a profound impact on mortgage rates.”
Lewis Shaw, of Shaw Financial Services, offered a retrospective perspective: “Hindsight is, as they say, a wonderful thing. If given the chance, most individuals would undoubtedly rewind to 2021 and lock in a 10-year mortgage at a 2 per cent rate. Instead, hundreds of thousands of mortgage holders fall prey to optimism bias year after year. The undeniable truth is that it’s always a gamble.”
Beyond the Two-Year Fix: A Different Kind of Shock
While those coming off two-year rates may feel hard done by, some customers who haven’t yet experienced the sting of higher rates could face an even more significant shock.
Certain borrowers secured five-year fixed mortgages in 2021, prior to the BoE’s interest rate hikes. They may currently be on deals with interest rates below 1 per cent.
Caitlyn Eastell, Personal Finance Analyst at Moneyfactscompare.co.uk, highlighted the potential impact: “Millions of customers remortgaging are set to encounter a startling increase in their monthly repayments. This is particularly true for homeowners whose current deals are low-rate, five-year fixed agreements.
- Projected Increases: Analysis suggests that if these borrowers opt for a shorter, two-year term upon renewal, their monthly repayments could escalate by nearly £4,900 annually. Over the full two-year term, this equates to an additional cost of almost £9,800.
- This projection is based on an assumed borrowing amount of £250,000 over a 25-year term.
The Shifting Economic Landscape
In recent weeks, nearly all major banks have adjusted their fixed mortgage pricing upwards, with some implementing multiple increases. This recalibration stems from the growing expectation that the BoE might raise interest rates later this year, driven by persistent inflation.
Previously, before March, experts had widely anticipated the BoE would begin cutting interest rates in 2024. However, recent sentiment from financial markets indicates the possibility of up to four rate hikes. The current base rate stands at 3.75 per cent. Therefore, four increments of 0.25 percentage points each could see the base rate climb to 4.75 per cent.
The cost of borrowing is also influenced by swap rates, which are intrinsically linked to future predictions for the base rate. These swap rates have seen an increase, partly attributed to ongoing geopolitical tensions, including the conflict between the US and Iran. This complex interplay of factors is contributing to the current volatility in the mortgage market.
