Nearly 750,000 households could face an average £170-a-month bill increase this year. The Bank of England says these households are currently paying interest rates of less than 3%, meaning many face a painful jump when they are forced to refinance at today's much higher rates as cheap fixed-rate deals expire.
The outlook has just become more difficult after mortgage lenders reversed a recent run of rate cuts. The Moneyfacts Average New Mortgage Rate has risen from 5.47% in July to 5.59% in August, wiping out the previous month's 0.12 percentage-point fall. Average two-year fixed rates have climbed to 5.63%, while five-year fixes have risen to 5.66%.
Rate rises amid market volatility
The increase comes amid volatile financial markets, with higher swap rates linked to fears that the conflict in the Middle East could push up oil and energy prices and reignite inflation. The Bank of England has already warned that higher quoted mortgage rates mean more borrowers are likely to see their repayments rise when they refinance.
For those with only a 5% deposit, the average five-year fixed rate has now breached 6%, standing at 6.08%, according to Moneyfacts. But there is some better news for borrowers hunting for a deal. The number of mortgage products available has risen for a fourth consecutive month, increasing by 180 to 7,357. Moneyfacts says around 90% of deals withdrawn during the mortgage market turmoil in March and April have now returned.
Short shelf-life for deals
However, borrowers face a rapidly changing market. The average mortgage deal was available for just 11 days in July – down from 14 days in June and the shortest shelf-life since April, when the figure fell as low as eight days.
Rachel Springall, Finance Expert at Moneyfacts, said: “Lenders were somewhat forced to U-turn on fixed rate cuts in July, knocking back the short-lived progress of three consecutive months of reductions to the average two- and five-year fixed rates.” She added: “Persistent concerns over the future outlook of interest rates led to swap rate volatility, driven by unrest in the Middle East.”
Impact on homeowners
The warning will be particularly significant for homeowners who locked into ultra-cheap mortgages before the sharp rise in borrowing costs from 2022 onwards. The Bank of England says nearly 750,000 households paying less than 3% interest will come off fixed-rate deals during 2026 and face an average repayment increase of £170 a month. That works out at around £2,040 a year in extra mortgage payments.
The Bank says the typical owner-occupier coming off a fixed-rate deal over the next two years is projected to face a much smaller average increase of £45 a month, but those on the cheapest pre-2022 deals face substantially bigger rises.
Advice for borrowers
Ms Springall said borrowers coming off cheap deals should act early. “The limited timeframe makes it ever more essential to seek advice early, particularly those who are due to remortgage this year,” she said. “Borrowers could choose to refinance with their existing lender for ease, but it’s always wise to shop around first to get a sense of the new rates on offer, particularly if coming off a low-rate deal.”
She warned that waiting could prove costly because the average mortgage revert rate remains above 7%. The average Standard Variable Rate is currently 7.13%, according to Moneyfacts, although that is down from 7.42% a year ago.
The Bank of England's Bank Rate is currently 3.75%, having been held at that level at its July meeting. The Bank has warned that higher energy prices caused by the Middle East conflict could push inflation higher later this year. Ms Springall said: “The prolonged conflict has driven up oil and energy prices, raising inflationary fears which could in turn lead to future Base Rate increases by the Bank of England.” She added that mortgage availability had improved but said there was “always more room for improvement” in the range of deals available to borrowers with smaller deposits.
