Rate rises could buck 5-year trend of cheaper mortgages

Rate rises could buck 5-year trend of cheaper mortgages
Ian Forsyth/Bloomberg

Mortgage interest rates are typically lower in the latter months of the year due to pressure among lenders to meet targets, but advisers are wary this trend could be bucked this year against the backdrop of a rising rate environment.

Over the past five years, from 2016 to 2021, interest rates have been lowest on average in the final quarter of the year, according to FCA data collected by financial planning firm Prosperity Wealth.

In Q4, rates sat at an average of 2.08 per cent over this five-year period, compared to 2.16, 2.15, and 2.12 per cent in Q1, Q2 and Q3, respectively.

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However, with four base rate rises since December, the housing market is no longer on an interest rate decline, but rather on a steep incline.

This has prompted some advisers to question whether the trend of end-of-year low interest rates compared to the rest of the year will continue.

QuarterInterest rate %

Regulated residential loan interest rates by quarter for years 2017 – 2021

Director at Just Mortgages, Carl Shave, said the final quarter of the year is typically a time on the calendar when lenders will assess their borrowing levels for the year and - to ensure targets are met - adjust rates accordingly to attract the business. 

"Perhaps akin to the car market when at certain times of the year dealers look to offer incentives to attract buyers," he explained.

But he pointed out that the period the FCA data covers which Prosperity Wealth has analysed does not take into account a market with rising interest rates. The base rate has jumped from 0.1 per cent to 1 per cent over the past six months.

"As such, whilst I suspect we will still see lenders keenly price their products to fulfil their lending quotas for the year, everything is relevant to the price of rates at the time," Shave said.

"Therefore interest rates available in Q4 could still be higher than that on offer earlier in the year for 2022. But these will be proportionate and still be keenly priced to encourage borrowing."

Director at L&C Mortgages, David Hollingworth, said rates have moved "really quickly" and that there’s no sign of a slowdown in the volume of lender changes.

Data analysed by Hollingworth's advice firm shows mortgage rates have more than doubled since historic lows in October 2021.

By mid-May, the average of the keenest low loan-to-value two and five-year remortgage rates from the top 10 lenders were both well above 2 per cent, at 2.36 and 2.46 per cent respectively, having risen from the historic lows of 0.89 and 1.05 per cent respectively last October.

"Lenders have often sharpened their remortgage pencil as the end of the year begins to loom on the horizon. There will also often be a maturity spike at the end of the year so lenders may target that group of borrowers starting to shop around a few months before," said Hollingworth