Mortgage Rates Surpass 6% as Lenders Hike Prices Amid Inflation Fears

Average five-year fixed mortgage rates have now surpassed the 6% threshold, marking the highest level since September 2023, according to data from Moneyfacts. This development signals a significant increase for homeowners seeking new mortgages or looking to remortgage.

Two-year fixed rates are closely following, standing at 5.98%, their highest point since December 2023. While borrowers with substantial home equity may still find rates below 5%, these deals are rapidly diminishing. Moneyfacts reports that 99% of mortgages with rates under 5% have disappeared from the market since early September, with only nine such deals remaining, down from approximately 1,500.

Many major lenders have implemented multiple rate increases in recent weeks. Barclays, for example, has raised selected fixed rates on four occasions, while HSBC, Lloyds Bank, Nationwide, NatWest, Santander, and TSB have each made three rounds of hikes.

Reasons for Rising Rates

At the start of the year, typical two-year fixed mortgage rates were below 4%, with some as low as 3.5%. Projections indicated that the Bank of England would lower its base rate throughout 2026, which would typically lead to decreased borrowing costs and falling mortgage rates. However, recent geopolitical events, including escalating conflict in the Middle East and subsequent increases in energy costs, have fueled fears of renewed inflation.

Despite the Bank of England holding its base rate at 3.75% in September for the sixth consecutive month, there is now an expectation that interest rates may need to rise. This strategy aims to curb inflation by making borrowing more expensive and encouraging reduced consumer spending. Investors are currently anticipating a jump in rates to 4.75% by next year, with potential to reach 5%.

Bond yields, reflecting government borrowing costs, have also seen sharp increases due to inflation, rising public debt, and concerns about the upcoming government budget. These rising bond yields directly influence mortgage rates.

Advice for Borrowers

Financial experts predict that mortgage lenders will continue to increase rates in the coming weeks. Borrowers whose fixed-rate deals are ending soon are advised to secure a new rate as soon as possible.

Some lenders permit borrowers to arrange a new mortgage up to six months before their current deal expires, while others offer a three-month window. Borrowers typically have the option to switch to a different deal if rates decrease before their new mortgage commences.

"Rising funding costs are putting pressure on lenders, which may lead to further repricing in the weeks ahead," said David Hollingworth, associate director at broker L&C Mortgages. "Borrowers who are considering fixing would be wise to act sooner rather than later."

He added that rates can be withdrawn from the market with little notice, emphasizing that securing a rate now provides protection against further increases while retaining flexibility. It is also recommended that borrowers compare offers from various banks and building societies, rather than solely relying on their current lender. Consulting a fee-free mortgage broker can assist in navigating the market and identifying the most suitable deals.

When selecting a mortgage, it is important to consider arrangement fees, as these can significantly increase the overall cost, particularly if rolled into the loan. A mortgage with a slightly higher rate but no fee may prove more cost-effective in the long term than a lower-rate option with substantial fees.