In under two weeks, a key vote will determine the next course of the UK economy, that could send mortgage costs spiralling.
With inflation still on the rise and global bonds being sold off, money markets are suggesting an increased chance the Bank of England (BoE) will hike interest rates, a move which would be beneficial for savers but problematic for homeowners, businesses and the wider economy.
Over the past four weeks, the yield on two-year UK gilts – considered a proxy for swap rates, which mortgage prices are based from – has increased more than 7 per cent.
With the current two-year yield standing at 4.54 per cent and the BoE’s base rate still at 3.75 per cent, the market is pricing for up to three rate hikes in the coming months – though these fluctuate regularly and do not always transpire into actual Monetary Policy Committee (MPC) votes to move the base rate.
However, more analysts have signalled an expectation that a rise will come sooner rather than later, with even the BoE’s own chief economist, Huw Pill, saying this week that rates needed raising.
For homeowners needing to renew their mortgage terms, of which there are an estimated 900,000 across the second half of 2026, that is set to mean a notable rise in interest payments if they delay agreeing a new deal – or, usually a worse situation, move onto their lender’s Standard Variable Rate (SVR).
An SVR is usually what a mortgage deal moves to after its fixed term, for example two or five years, has finished. The rate tends to be higher than fixed deals and will increase or decrease along with any BoE base rate movements, which could mean a double jump of interest payments if homeowners saw deals end right before a base rate hike is voted for. Base rate tracker deals also move up and down in line with BoE rate changes, though are usually lower than SVRs.
Moneyfacts data shows the average two-year tracker rate on Friday is 4.51 per cent, while the average standard variable rate on 1 September was 7.13 per cent.
Get a free fractional share worth up to £100.
Capital at risk.
Terms and conditions apply.
ADVERTISEMENT
Get a free fractional share worth up to £100.
Capital at risk.
Terms and conditions apply.
ADVERTISEMENT
On a £250,000 mortgage lasting 25 years, the difference in combined interest and capital payments across deals at those rates is close to £400 monthly, or £4,760 annually.
If the homeowner in the above example is already on their lender’s SVR and the BoE increases the base rate to 4 per cent, most lenders would pass this on by hiking their SVR accordingly from the following month – meaning a rise of just over £40 per month, or £483 a year.
This is why most experts and brokers recommend locking in a potential deal before an existing one runs out. Most lenders allow you to do this once you are within the final six months of a fixed-term deal. If a better options comes along afterwards before your new deal starts, you can often change to the improved terms.
And if, as is the case this week, lenders start to remove the best deals and replace them with more expensive ones, you’ve already locked in a better option than remains on the market.
Coventry Building Society increased rates on some of their mortgage products on Thursday and several more are expected to follow.
Justin Moy, managing director at EHF Mortgages, urged borrowers to lock in a deal quickly.
“The warning most mortgage brokers gave at the start of the week has come true, with mortgage lenders having little choice but to raise mortgage rates as borrowing costs rise,” he said. “It’s become a race to the top; borrowers need to be aware and act quickly to secure deals, especially those looking to remortgage in the coming months and particularly those on 1-2 per cent rates from 2022.
“There is little to suggest improvements are on the horizon. The October Budget needs to be a belter to save 2026,” he added.
However, that doesn’t mean all the good deals are gone, it just means those needing a new mortgage deal need to move quickly and make a decision which will at least clarify their expenses for the next few years.
HSBC made some reductions across its range of mortgages on 1 September, as one example, but the top deals do tend to be removed fast, especially as overall rates head upward.
“My advice to anyone looking to remortgage or purchase right now is simple: lock in your offer of a rate now rather than waiting to see if things settle, because ‘wait and see’ in this market usually means watching the rate you wanted disappear,” concluded David Stirling, independent financial adviser at Mint Wealth.
