Why are mortgage rates increasing?

In recent weeks, the majority of lenders have increased their mortgage rates, largely due to significant movements in the financial markets. Fixed-rate mortgage products are typically priced using SONIA swap rates, which reflect market expectations of where the Base Rate will be over a given period.

Previously, markets had anticipated further rate reductions in 2026, which contributed to a decline in mortgage rates over the past couple of months.

However, since the escalation of conflict in the Middle East and the resulting rise in oil prices, there are growing concerns that inflation may increase, alongside the cost of everyday goods. The Bank of England has a target of maintaining inflation at 2%. Should inflation begin to rise again, it would limit the Bank’s ability to reduce the Base Rate and may even require consideration of future increases.

As a result, financial markets have adjusted their expectations, leading to a rise in swap rates. This, in turn, has prompted mortgage lenders to increase the rates they offer.

What are my options if I am looking for a mortgage or my current deal is ending?

If you are looking to step onto the property ladder or move to your next home, your options for securing a mortgage product in advance are limited until you are in a position to proceed. Most lenders will only allow you to secure a mortgage rate once you have had an offer accepted on a property and have submitted a full mortgage application.

However, you can prepare in advance by ensuring that all necessary documentation is in place. This will enable you to proceed quickly and secure a suitable product as soon as you are ready to apply.

If your current mortgage deal is approaching its end date, you may be able to secure a new deal with an alternative lender up to six months in advance. In contrast, product transfers with your existing lender are typically only available closer to the end of your current deal. While this timeframe varies by lender, it is generally around three months before expiry.

Fixed rate mortgage products

A fixed rate mortgage product has a set interest rate for the length of time that you agree to take it for. The most common being 2 and 5 year fixed rates, however there are many more options such as 3, 7, 10 or lifetime fixed rate products. The length that you would fix your mortgage for is influenced by factors such as your views on interest rates and your life plans along with how long you may stay in the property you are mortgaging.

The benefit of taking a fixed rate is that this type of mortgage product allows you to budget given the set monthly payments that you will have. Also, if interest rates increase during the period you are fixed into your product, you will not be impacted by these increases until the end of your fixed period.

However, the drawback of taking a fixed rate mortgage product is that should interest rates reduce during the time you have your product, you will not benefit from these reductions as the interest rate you have is set.

Variable rate mortgage products

There are two main types of variable rate mortgage products, these are a base rate tracker and a discounted variable rate. Both products work very differently so it is important to understand the differences and how changes in the market would influence your mortgage payments.

A base rate tracker mortgage is directly linked to the Bank of England base rate, these products sit at a set margin above the base rate and will change in line with any changes that the Bank of England decide to make. Therefore, should the base rate reduce, you should see a reduction into your mortgage payments soon after. On the other side, should the base rate be increased, this would see your mortgage payments increase. Mortgage lenders will update you should there be a change in your mortgage following a Bank of England decision.

As for discounted variable rates, this type of mortgage product is linked specifically to the lenders standard variable rate. This means that the rate you are being charged will only change when the lender decides to amend their own standard variable rate, this is not always dependent on market conditions as it is completely up to the lender as to when they change this. Even if there was a reduction in the base rate or it increased, the lender does not always pass this change onto their standard variable rate. With this type of product, it is not so easy to predict when you might see a change in your interest rate and in turn your mortgage payments.

The reason someone might take a variable rate mortgage product would be to benefit from falling interest rates. However, this type of mortgage product gives you no certainty or the ability to budget your finances as your mortgage payments could change at any time by any amount.

The MPC’s role is to ensure that inflation in the UK stays at 2% however over the last two years, this has been as high as 11.1%. High inflation pushes the prices up of everything that we buy, the main tool that the committee has is to increase interest rates in a bid to curb peoples spending. By doing this, demand for goods reduces and in turn helps drive prices down or at least the speed at which they are increasing.

What does their decision mean for my mortgage?

If you have a fixed rate mortgage, you will not see your payments change as your interest rate is set for the agreed period you took it for. However, if you have a base rate tracker, you will see a reduction in your payments almost straight away. Your lender will be in touch to explain how this reduction affects your mortgage specifically. You may have a discounted variable rate, his type of mortgage product is not directly linked to the base rate and is based on your lenders specific variable rate. Therefore, it is up to your lender as to whether they pass this reduction on.

How has the mortgage market reacted?

The initial reaction to the decision yesterday is positive. The rates at which lenders trade money at has fallen sharply since the news broke yesterday, should this continue then over the next few days/weeks we should see lenders start to reduce their mortgage products.

Why are mortgage rates so high?

Mortgage rates have increased a lot over the past 12 to 18 months, this is a result of uncertainty in the financial markets following the mini budget in October 2021 and impacted further by inflation increasing at a very quick rate earlier this year. The Bank of England had to increase the cost of borrowing to curb peoples spending as this helps reduce inflation, they have increased the Base Rate from 1.75% in September 2021 to 5.25% today.

What is the impact of today’s news for me and my mortgage?

As there hasn’t been a change to the Base Rate today, you are unlikely to see a change to your mortgage. However, today’s accountment is positive news if you are one of the nearly 1.6 million people who has their mortgage deal ending in 2024. It is positive news because the fact that it didn’t change today will breed further confidence in the financial markets, it shows that we are past the worst of inflation. We have seen a positive reaction to the news today, the rates that lenders trade money between them have fallen a lot and to a level that we haven’t seen for over a year. This is important as these rates are what lenders use to price their fixed rate mortgage products, therefore should this continue as expected the rate that you can get for your mortgage could be lower than what they are today.

When should I look to secure a new mortgage deal if mine is expiring?

As a general rule, you can look to secure a new deal for your mortgage 6 months before the end of your existing one. This would certainly be the case if you wanted to move your mortgage to a new lender, however some mortgage providers only allow their existing mortgage customers to secure a new deal 3 months before the end of their current product.

We are still in a very unpredictable market and it might not take much for rates to start increasing again. Therefore, we feel it is important to understand what options are available to you at the earliest opportunity. This ensures that you have a worse case option of your mortgage, most mortgage lenders will allow you to change the rate if they fall from the point you apply for the mortgage to just before your new product is due to start. If you don’t secure anything and rates increase, unfortunately you will have to take one of these products with the higher rate.

Step 1 – Income multiple

The first thing that a lender will do when assessing what you are able to borrow is multiply what income of yours that they are able to use to support a mortgage by a particular amount, the multiple that each lender uses is generally between 4 and 5 times. The figure that they will use will vary based on your circumstances and will differ from lender to lender. Lenders generally look at your income level and the amount of deposit that you have, the higher your income and deposit, generally the higher income multiple that they can use.

Step 2 – Affordability

The second part to the calculation involves the lender making sure that you can afford the payments if interest rates increased, they will take the amount that you can borrow in step one and apply a rate of generally around 3% above the lenders standard variable rate. For example based on the time of writing, Halifax’s standard variable rate is 8.74% so they would look to ensure that you could afford the payments if the interest rate was 11.74%.

It is within this step that your finances are reviewed, the lender will look at any financial commitments you may have and include them within this part of the calculation to make sure you can still afford the mortgage. A lender will look to include anything that you cannot stop in order to meet your mortgage payments, examples of the type of things that they will include are:

• Financial agreement – Loans, credit cards, other mortgages, car finance/leases, overdrafts etc
• Student loans
• Number of people that are financially dependant on you
• Childcare or university costs
• Property related costs such as ground rent and service charges

The impact of these commitments along with the higher stressed mortgage payments, could reduce what you can borrow from the first step of the calculations. The more outgoing that need to in included within the calculations, the greater the impact that there will be on what could be borrowed.

Below is an example of the impacts of having additional commitments to maintain alongside your mortgage, this is based on a couple with no dependants and a mortgage over 35 years:

Step 1:

Step 2:

These calculations are based on one lenders affordability calculations at the time of writing, they do change in line with market conditions so could vary.

To increase your chances, you need to present a strong and positive picture of your business and income stability. Lenders will look at factors such as your industry, previous employment history, and whether your turnover matches the income you’re trying to use for your application. Whether you’re a sole trader or limited company, the paperwork required may differ. Keep in mind that lenders will likely ask for your SA302, tax year overview, and business bank statements.

A recent example where we’ve been able to help a client:

Mr and Mrs approached us to see if we could help them purchase their first home. They have been renting for a number of years, but their landlord has decided to sell the property. Mr had only been running his scaffolding for just over a year and were told that they would struggle to get a mortgage after their bank said they couldn’t help. Therefore, understanding whether they could get a mortgage was very important to them given they didn’t really want to rent another property.

We sat down with them and went through their circumstances, we discussed the documents that we would need from his accountant to establish what a lender could use to support their application. Having obtained his accounts and tax returns, we could see that the company had been very successful in just its first year of existence however he left money in the business and didn’t draw it all via dividends. We were able to use his both his director’s salary and the company’s net profits to support their application as this showed a higher income than his tax returns.

Using his company accounts rather than his SA302’s, meant that they were able to borrow a lot more than they had originally thought and buy a home big enough for them and their family.

Being able to use these figures has meant they have been able to apply to purchase their first home together and move in before their landlord sells the property that they are currently renting.

On Wednesday, the Office of National Statistics released the inflation figures for the UK in the year to August. It was widely discussed by economists, including the Chancellor himself, that we would see a slight increase in inflation. However, they were wrong. Inflation fell marginally by 0.1% to 6.7%, this is the third consecutive month that the figure has fallen. This unexpected news comes largely due to the cost of food prices slowing further than many had expected, this is welcome news to many with the cost of everyday items increasing at a slower rate than they were a year ago. Whilst inflation is still a lot higher than the Bank of England’s target of 2%, the fact that the rate of inflation has fallen for three consecutive months has been well received in the financial markets.

This week also saw the Bank of England meet again to vote on what to do with the base rate, the nine committee members voted 5:4 in favour of keeping the base rate at 5.25%. Many market experts were factoring in a 15th consecutive increase in the base rate to 5.5%, however following the United States not increasing their borrowing rate and the inflationary figured released the day before, the committee voted not to increase the base rate during their meeting. Again, this news has had a positive affect to financial markets and instilling more confidence in the UK economy. The rate at which lenders trade money between them at has fallen by nearly 0.7% for 2-years and 0.6% for 5-years (at the time of writing) compared to what they were a month ago.

What does all this mean for me and my mortgage?

The more the UK’s inflationary figure falls closer to the Bank of England’s target of 2%, the less pressure the Bank’s committee have to increase the base rate further and they can start to reduce it the closer that it gets to their target. Reducing inflation means that the previous increases in the base rate will be having the desired effect on peoples’ finances that they are intended to have. This breeds more confidence in the UK economy, more confidence that there is in the economy means lenders can buy money at cheaper rates. In turn, these cheaper rates can then be passed onto the price of fixed rate mortgage products.

A large number of lenders starting to reduce their fixed rate products this week, Nationwide and NatWest have both reduced rates by up to 0.31%, TSB have also reduced some of their fixed rates by to 0.25% as well. The fact that rates are starting to reduce is great news for the mortgage market, however securing a new product early is particularly still very important in what is still an unstable market. The vast majority of lenders will allow you to change the rate you have secured if rates fall between now and your new product coming into effect, if rates increase and you haven’t already secured a new product then you would have to select one of the higher rates.

We believe that it’s important to seek professional advice for your mortgage, this ensures that you fully understand all the options available to you. All mortgages are based on your circumstances and failure to maintain your payments could result in your home being repossessed.

What does my report look like and how is it calculated?

Your report breaks down what payments you have made to your accounts over the last 6 years, from this history you will be given a score which is normally between 0 and 999. Both your score and history are things that lenders look at when judging whether to accept your application or not, generally the higher your score the greater chance of your application being approved.

Why is it important to check my report?

It is important to understand your report before making an application, you will be able to see everything that a lender will when they assess your application. Knowing what your report looks like prior to applying will help you avoid any shocks from your application being declined and it gives you a chance to put anything right that s impacting your score.

What can I do if there is something on my report that should not be there?

If there is something on your credit report that you believe is there in error, the best thing to do is to speak with the company that the error relates to. They should be able to discuss this with you and explain why they have added it to your report, if they have made a mistake they will also be able to remove it.

How do improve my score before applying?

There is not a quick fix to improving your score which is why it is important to understand it in advance of when you are looking to apply. Some of the best things that you can do is to make sure that you are on the voters roll at your home address, keep the number of ‘hard’ credit scores to a minimum 6 months before applying and make sure all of your commitments are paid on time and for the right amounts.

What is the difference between a ‘soft’ and ‘hard’ credit search?

The type of credit search a lender makes against your report can have an impact to your score, it is important to know what type of search they are doing before the lender does it. A ‘soft’ search will give the lender a snapshot of your credit history, this will normally flag anything that the lender may not like. This type of check will show on your full report but does not impact your credit score. A ‘hard’ credit search is conducted when you formally apply for credit, this will impact your score and to many of these in a short period of time will have a negative effect to your overall report.

Can I still get a mortgage if my report is not very good?

There are a number of lenders that will help people who have had issues in the past. They will need to understand exactly what the issues have been, when they were and the amount they were for. Lenders also have very particular rules as to what they are happy to accept and what they would not be. For these reasons, it is important that you have an up-to-date copy of your full report so any issues can be identified before making an application and potentially affecting your score further.

Whilst this is good news, we have dug deeper into the details from the announcement today. The fall in inflation is largely due to the reduction in the cost of gas and electric compared to a year ago. When removing this from the calculations, inflation figures have stayed at a similar level to last month when they were released.

We have also seen that the UK’s wage growth figures have also been released today for the period of April to June. For the first time in a while, wage growth in the UK is now above the rate of inflation. This has been recorded today at 7.8% by the Office for National Statistics.

Our View

The fact that the UK’s inflation figures have fallen significantly is very positive. it indicated the costs of things in the UK aren’t increasing as quickly as they were previously.

However, given that the inflation figures without gas and electric remains at a similar level plus the recent figures showing high growth in wages compared to inflation will give the Bank of England something to think about. The reason that they could be concerned by today’s announcement is because increasing wages at higher levels than inflation could cause inflation to start rising again which they do not want.

We have read today that financial markets are starting to factor in another Base Rate increase on the 21st September, this has resulted in the rate that lenders trade money between themselves at have increased today compared to what they were yesterday. This could mean that lenders, after starting to reduce the cost of their fixed rate mortgages, have to start increasing them again.

Many people have been on very low fixed rate products for a number of years and these increases are having a huge impact to their finances, these increases come at the same time that the cost of energy and food have risen significantly which is increasing the pressure on households further.

A large majority of lenders will allow you to secure a new product for your mortgage 6 months prior to your existing deal expiring, this will allow you to understand what your mortgage payments could look like and allow you to start adjusting your finances accordingly. You can do this with your existing mortgage provider or with another lender if they have a preferential deal and you meet their requirements.

Why is it important to secure a new product as soon as possible?

We believe that it is important to review your mortgage at the earliest opportunity, by doing so you will know exactly what your mortgage payments are going to be worse case. A lot of lenders will allow you to change your product should rates reduce between the time of you securing your new rate and it coming into affect. Once your new product has started, you will not be able to change it without paying a penalty should there be one with your new mortgage product.

Securing a new product early is particularly important at the moment. The cost of fixed rate mortgages are reducing, therefore you could secure a new interest rate now with the potential ability to change this should they fall further before it completes. Given that the financial markets are still unsettled, it might not take a lot before they start rising again. If you haven’t already secured a new product then you would then be looking at having to take one of these new high rate products should they start increasing again.

We used this to great effect earlier this year, a client of ours secured a new rate 6 months prior to the end of their deal while rates were increasing. The initial rate that we secured was a 5 year fixed rate at 5.70%. By managing this closely over the 6 months before the new mortgage needed to take affect, we were able to reduce this to a 5 year fixed rate at 4.06% as interest rates across the market reduced during this period. This meant our customer paying over £29,000 less in interest over the next 5 years!

It is extremely important that you seek advise for your mortgage and you fully understand all of your options available to you, all mortgages are based on your circumstances and failure to maintain your payments could result in your home being repossessed.