The cost of a fixed rate mortgage has increased for first time buyers and the Bank of England is expected to raise base rates next month.
Latest data from Moneyfacts shows the cost of a two-year fixed rate mortgage has increased in the last month and in particular for high loan to value (LTV) deals.
First time buyers with a small 5% deposit will have a high 95% LTV mortgage and are the hardest hit with a rise in borrowing costs ahead of the expected hike in the Bank of England base rates.
Base rates are expected to rise from 0.25% to 0.50%, the first time since the financial crisis in 2007 which could end the current record low mortgage rates.
This is likely to increase the cost of borrowing for first time buyers, remortgage buyers, home movers and buy-to-let landlords for both fixed rate and tracker mortgages.
Cost of mortgage borrowing increases
Even before any rise in the Bank of England base rates the cost of a two-year fixed rate 95% LTV mortgage has increased by 0.10% compared to only 0.03% for a 60% LTV mortgage.
The following table from Moneyfacts shows the average two-year fixed rate mortgage cost for different LTVs compared to October 2017.
| Date | 95% LTV | 60% LTV |
|---|---|---|
| Six months ago | 4.14% | 1.83% |
| A month ago | 4.16% | 1.66% |
| October 2017 | 4.26% | 1.69% |
Charlotte Nelson, finance expert at Moneyfacts said, the recent upward turn in rates is apparent across the mortgage market, however first time buyers seem to have been hardest hit, seeing rates shoot up by 0.10% in just one month.
Many first time buyers will be frustrated by the news that rates are rising while base rate has yet to do so. However, it goes to show that we don’t necessarily need to see a base rate rise for interest rates to increase, says Ms Nelson.
If base rates rise by 0.25% in November, homeowners with a £200,000 tracker mortgage would pay about £21 pm extra, costing them £250 more each year.
For remortgage buyers currently on your lenders standard variable rate, to reduce costs you can switch to a new fixed rate mortgage deal helping you with lower monthly repayments.
Increase in swap rates
The pricing of fixed mortgage rates depends on several factors, but mostly whether banks can get their hands on cheap money to lend out.
They usually get it from savers or by borrowing from other banks on the money markets, buying money at a certain rate called the swap rate that react to expectations of future interest rates and inflation, which affect the price of mortgages.
In the past two years this relationship seemed to have broken due to the volatility of the rates but also the fierce competition among lenders in the mortgage market.
However, the two-year swap rates has increased from 0.54% to 0.82% in the last month and lenders are factoring in the sudden rise.
This is the strongest indication yet for first time buyers, remortgage buyers, home movers and buy-to-let landlords that a base rate rise is likely.
For older equity release mortgage buyers accessing wealth in their property, the rise in base rates could increase the roll-up cost of their plans which are usually arranged on a fixed rate basis.
What are your next steps?
Call our LCM mortgage brokers for advice if you are a first time buyer, want to remortgage your existing home for the best mortgage deal, moving home or are a buy-to-let investor.
Learn more by using the property value tracker chart, mortgage costs calculator and equity release calculator. Start with a free mortgage quote or call us and we can take your details.
For equity release buyers our London City Mortgage advisers can recommend lifetime mortgages allowing you to receive cash from your property for home improvements, holidays or even buy a more expensive home.
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