Fixed RateMay 9 2022

Average two-year mortgage rates move past 3%

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Average two-year mortgage rates move past 3%
Photographer: Anthony Devlin/Bloomberg

The average two-year fixed mortgage rate has surpassed 3 per cent for the first time in more than seven years.

At 3.03 per cent, this is the highest average on record since March 2015 (3.06 per cent), according to Moneyfacts.

Since December, the average two-year fix has risen by 0.69 per cent, amid the backdrop of a rising base rate and soaring inflation.

“Mortgage rate repricing has continued at pace,” said Moneyfacts finance expert Eleanor Williams.

“The five-year equivalent of 3.17 per cent has also risen, and sits at its highest in six years (May 2016 – 3.17 per cent).”

With a margin of just 0.14 per cent now separating the two and five-year averages, the difference between them is the smallest recorded since February 2013 (0.08 per cent). 

“This could indicate that providers may be adapting their pricing towards borrower preference potentially shifting towards longer term fixed rate options in order to protect themselves from further pricing volatility,” Williams explained.

Back in March, data came to light which highlighted that swap rates - a leading indicator for mortgage rates - had inverted. Two-year swap rates climbed above both five and 10-year rates on February 3, 2022. 

Typically, two-year fixed rates are priced lower than longer fixes, which tend to cost more because a borrower is locking in a fixed rate for longer.

The swap rate inversion, a Knight Frank Finance expert told FTAdviser, suggested there is more risk on a two-year horizon than there is on a five or 10-year one.

“First-time buyers could understandably be feeling disheartened by the combination of rising house prices, mortgage rates surging and increases in their cost of living impacting on affordability,” said Williams.

Annual house price growth remained at double digits in April, the base rate has now risen to 1 per cent from 0.1 per cent over six months, and inflation has hit 7 per cent - far surpassing the Bank of England’s 2 per cent target.

But despite the rising backdrop, Williams said first-time buyers can take some solace in higher loan-to-value mortgage rates.

“They [first-time buyers] may take a small glimmer of hope from the fact that, at 369 deals, the provision of products offered at 95 per cent loan-to-value is at its highest since pre-pandemic March 2020 (391),” she explained. 

“The average two- and five-year fixed rates at both 95 per cent and 90 per cent loan-to-value may have risen month-on-month, these are the only two lending tiers where the average rates remain lower now than they were at this time last year.

“While there may be some who are forced to delay their homeownership dreams due to wider economic pressures, recent movements in this sector seem to indicate that lenders could be keen to continue to cater to this demographic where possible.”

ruby.hinchliffe@ft.com