UK Mortgage Rates Surge as Lenders Withdraw Sub-5% Deals

More than 1,000 mortgage deals with rates below 5% have been removed from the market in the past month as lenders rapidly reprice due to a sell-off in the bond market. Barclays has increased some of its mortgage rates for the second time this week, mirroring a trend among lenders to raise costs for homeowners.

Rising inflation, partly fueled by the Middle East conflict, has intensified concerns that the Bank of England may increase its base interest rate. Figures from rate scrutineer Moneyfacts show that the number of two-year fixed mortgages available at under 5% has plummeted from 630 at the start of September to just five. Similarly, five-year fixed deals have fallen from 638 to seven in the same period.

The cheapest available five-year fixed mortgage rate is 4.91%, offered by Skipton Building Society with a £1,995 completion fee, and a 4.93% rate from Yorkshire Building Society with a £1,495 fee. Both deals are reserved for borrowers with at least a 40% deposit.

Currently, the average rate for a two-year fixed mortgage stands at 5.93%, and a five-year fix at 5.95%. This marks a significant increase from the beginning of the year, when most borrowers could secure rates below 4%, with some two-year fixes dipping as low as 3.5%.

Several lenders, including Nationwide, Virgin Money, and TSB, have also increased their rates this week. Barclays initially withdrew its 4.75% two-year fixed and 4.93% five-year fixed mortgages on Monday, replacing them with deals at 5.05% and 5.03% respectively. Further, undisclosed increases have been announced by Barclays.

Bond Yields Drive Mortgage Rate Hikes

The surge in mortgage rates is closely linked to rising gilt yields, which represent the returns on government borrowing. Concerns over inflation, increasing public debt, and upcoming government budgets have pushed gilt yields higher. When gilt yields rise, lenders' funding costs typically increase, which is then passed on to consumers in the form of higher mortgage rates. This can reduce affordability for potential buyers and potentially cool the housing market.

Yields on 30-year gilts have reached their highest level since January 1998, climbing to 6.029%. Five-year gilt yields are also at their highest since 2008. Shorter-dated rates, such as five-year gilt yields, have a more direct impact on mortgage pricing, according to mortgage brokers.

Borrowers Urged to Act Quickly

Experts predict that mortgage lenders will continue to increase rates in the coming weeks. Borrowers needing to remortgage in the near future are advised to consider fixing their rate now to secure a lower cost. Fixed mortgage rates can typically be secured three to six months before an existing deal expires. While borrowers can usually switch to a different deal without penalty if rates fall before completion, securing a rate now offers protection against further upward movements.

Dan Coatsworth, head of markets at AJ Bell, noted that rising gilt yields increase lenders' funding costs, which often translates to higher mortgage rates. Nicholas Mendes, mortgage technical manager at John Charcol, added that market uncertainty leads lenders to add extra margins to their rates. He advised borrowers not to assume current rates will remain available, especially with the Bank of England's next interest rate decision approaching on November 5.