At the start of 2021, borrowing costs were at all-time lows, with most mortgage deals for those with a decent amount of equity (40%) well under 2%. Headline rates for two-year fixed rate deals were as low as 1.2%. However, there were limited choices for those with smaller deposits, as lenders remained uncertain of both the direction of the pandemic and the housing market.
By late spring, the end of lockdown was in sight, confidence was returning, and the government launched its Mortgage Guarantee scheme. Lenders reacted by introducing a slew of new 90% and 95% LTV mortgages and things, at last, began to look up for first-time buyers.
By autumn, mortgage rates had fallen to record lows, with a significant number of deals under 1%. It wasn’t all good news – inflation, which was initially believed to be only a temporary spike, was proving unexpectedly stubborn. As a result, most commentators expected the base rate to go up in November. The emergence of Omicron, though, muddied the waters and the Monetary Policy Committee surprised everyone by holding off on the rise. The delay didn’t last long - in December, the MPC voted 8-1 in favour of increasing the base rate to 0.25%. Most lenders, however, had anticipated the move and had already increased their mortgage rates, with the best deals climbing from sub 1% to around 1.5%.
Looking ahead, with inflationary pressure continuing to build, the money markets are expecting a number of further rises and the base rate to reach 1% to 1.25% by the end of 2022 and the best mortgage deals to hit around 2%.
We are so used to low rates it may come as a bit of a shock to many of us, and it may cause the housing market to soften for a month or two as we get used to the idea. It should be remembered, though, that the 0.1% rate was only ever intended to be a temporary measure to soften the financial impact of the first lockdown back in 2020. Nor will the base rate be going up by much - for anyone coming out of a 5-year deal, 2% would represent a reduction rather than an increase, as the average rate five years ago was 2.34%. For those on a 3-year deal, there will be a rise, but only a very modest one, with the average rate around 1.81% when they fixed theirs.
One other key development this year may be the Financial Policy Committee’s review of the tight affordability measures introduced in the wake of the 2008 financial crash. It is expected to lead to the ending of the lenders’ limits on the number of new mortgages they can provide at high loan-to-values. It could also see the end of the requirement to test borrowers’ ability to pay if their mortgages rose by 3%. If implemented, the changes would provide a huge boost to first-time buyers, who could return to the market in significant numbers.
To give you an idea of where rates are, currently, below is a selection of this month’s best buys for those with a 40% deposit (source: Moneyfacts.co.uk):
Two-year fixed rates: 1.29% from HSBC. Product fee £999. 60% LTV.
1.33% from Natwest. Product fee £995. 60% LTV.
Three-year fixed rates: 1.44% from HSBC. Product fee £999. 70% LTV.
1.54% from HSBC. Product fee £999. 60% LTV.
Five-year fixed rates: 1.41% from HSBC. Product fee £1,499. 60% LTV.
1.44% from HSBC. Product fee £999. 60% LTV.
Discounted variable: 0.51% For 2 years. From Progressive BS. Product fee £0. 60% LTV.
0.79% For 2 years. From Progressive BS. Product fee £0. 75% LTV.
Best two-year fixed rate: 0.99% from The Mortgage Works. Arrangement 2.00% Advance. 65% LTV.
Five-year fixed rate: 1.49% from The Mortgage Works. Arrangement 2.00% Advance. 65% LTV
Best Discounted variable: 1.34% for 2 years. from Accord Mortgages. Completion £995. 60% LTV.
The information we provide is our personal opinion and should not be relied upon for financial advice. Should you need financial advice or guidance please contact an appropriate professional.