Homeowner Mortgage Rates Double in Five Years, Reaching 4% for First Time Since 2009

The average mortgage rate for homeowners has doubled over the past five years, reaching 4% for the first time since February 2009, according to Bank of England data. This marks a significant increase from the 2% rate recorded in December 2021.

This rise in rates on outstanding mortgage balances, not just new loans, has been driven by increased costs for lenders, influenced by the escalation of the war in Iran and subsequent increases in energy prices, which have fueled inflation concerns. The average rate for a new two-year loan currently stands at 5.91%, a stark contrast to rates as low as 1.1% available in December 2021.

Experts suggest that government intervention to reduce interest rates, control borrowing costs, address affordability, and reform stamp duty could provide much-needed relief. Julie Palmer, managing partner at BTG, emphasized the importance of these measures in the upcoming Budget.

The elevated mortgage rates have had a tangible effect on the housing market, with the number of mortgages approved for house purchases falling to their lowest level since December 2023. This trend is particularly affecting individuals looking to move to larger homes, as increased borrowing costs make such moves less feasible. Economic uncertainty, the removal of stamp duty incentives, and a general downturn in the housing market have compounded these challenges.

Estate agent Savills reported that mortgage approvals from February to August saw a 13% decrease compared to the same period last year, with nearly 55,000 purchase loans approved in August alone. Lucian Cook, head of residential research at Savills, noted that recent mortgage market volatility has made larger mortgages more expensive, and a lack of housing wealth accumulation due to pressure on house prices since September 2022 has deterred potential buyers, especially those looking to upsize.

While the government has introduced schemes like the 'Your First Home' initiative to assist first-time buyers with smaller deposit requirements, some experts believe that a more substantial impact would come from a sustained decrease in mortgage rates. Simon Gammon, managing partner at Knight Frank Finance, stated that while first-time buyer schemes can boost sentiment, borrowing costs remain the primary constraint on housing market recovery. A meaningful increase in transaction volumes, he suggested, will likely depend on a sustained improvement in borrowing costs.