With the average two-year fixed rate on a mortgage now around 6.52 per cent, many borrowers will be regretting their decision to leave or turn down five-year deals last year and lock into shorter fixes which, at the time, boasted record-low rates.
Despite recent efforts from the Bank of England to curb these rises through a growing bond buying programme, 10-year gilt yields have continued to rise. This has, in turn, pushed up swap rates - the leading indicator for mortgage rates.
Earlier this month, previous chancellor Kwasi Kwarteng met with bank bosses in response to the steep interest rate rises which followed his "mini" Budget announcement. It is understood they spoke about extending the mortgage guarantee scheme, which is meant to end this December.
Brokers have since said this extension will do nothing to solve the “looming refinance problem” facing those who took advantage of historically low rates.
“18 months ago we were all talking about historically low rates in the media,” Mansfield-based broker Lewis Shaw told FTAdviser.
In June 2021, signs of a rate war emerged as lenders such as HSBC, TSB, Nationwide and the Co-operative all placed sub-1 per cent deals on the shelves. Come September, one of the lowest ever rates recorded in Britain - 0.79 per cent - graced the market.
I was screaming blue murder.Lewis Shaw, Shaw Financial ServicesSub-1 per cent rates were largely two-year deals, which are typically less expensive than longer fixed deals - though this trend did invert for a time in early 2022.
Between June and early October, a flurry of headlines and TV spokespeople urged borrowers to see if they could take advantage of such low rates.
“Off the back of that, people were coming to see me saying ‘I’ve heard of this rate below 1 per cent’,” said Shaw.
There were two types of clients, the Mansfield broker explained. Those who had heard about these sub-1 per cent rates but were still unsure and wanted advice.
And those who were adamant about moving onto a cheaper, shorter fixed mortgage deal because they had read or heard something in the media.
I begged and pleaded with them [a client] to go with a five-year fix.Lewis Shaw, Shaw Financial ServicesThose clients who refused to compromise on a two-year fix were then treated as insisted clients by Shaw.
“I didn’t advise anyone on a two-year fix,” said Shaw.
“I said if you want a two-year deal, I’m not the broker for you. Other brokers will have had a different outlook, or clients will have gone direct to a bank.
“I knew this would come home to roost, so I put all my clients on five-year deals.”
Mortgage rates since Kwarteng's "mini" Budget
| Date | Two-year fixes, all loan-to-values | Five-year fixes, all loan-to-values |
|---|---|---|
| 23/09/22 [day of 'mini' Budget] | 4.74% | 4.75% |
| Week commencing 26/09/22 | 4.75% | 4.76% |
| Week commencing 03/10/22 | 5.75% | 5.48% |
| Week commencing 10/10/22 | 6.31% | 6.19% |
| Week commencing 17/10/22 | 6.47% | 6.29% |
Source: Moneyfacts
Shaw said the sheer “number of calls” he fielded after various media appearances on the topic was frustrating, because - he said - those fuelling the hype over these deals were not regulated financial advisers.
“I was screaming blue murder,” he said. “People were actually planning and forecasting their future. They were going ‘well my mortgage payment is only this, so I can afford to buy that car, that sofa, go on that holiday and put that on a credit card’.”
One of Shaw’s clients bought a house during the stamp duty holiday, which began winding down after the end of June 2021.
Shaw recalled: “I begged and pleaded with them to go with a five-year fix. They were adamant the rates wouldn’t go up.”
A few months ago, this client got in touch with Shaw. He said he wanted to pay a £3,000 early redemption fee and lock into a five-year deal.
“They were lucky, they got in early doors,” said Shaw.
The client moved from a two-year fix of 2.99 per cent to a five-year fix of 3.44 per cent. If he had listened to Shaw’s advice, he would be around £14,000 richer.
Some will be hit even harder by mortgage repayment increases alone, not taking into account early repayment charges.
If a borrower took out a £250,000 mortgage a year ago at a 1 per cent rate, that was £2,500 a year in interest.
If, at the end of a two-year fixed rate, the cheapest rate is 6.36 per cent - the average five-year rate as of today (October 19), according to Moneyfacts - then that £2,500 jumps to £15,900 annually.
This would see a person’s monthly payments jump from £208.33 to £1,323.
“It’s a very worrying time,” Shaw concluded.
ruby.hinchliffe@ft.com
