US Homeowner Mortgage Rates Double in Five Years, Reaching 4%

The average mortgage rate for homeowners has doubled in the past five years, reaching 4% for the first time since February 2009, according to data from the Bank of England.

This figure represents the interest rate on all outstanding mortgage balances, not just new loans. In December 2021, the average rate on these balances was 2%. Most major lenders have recently increased their mortgage rates due to inflation concerns, exacerbated by the escalation of the war in Iran and rising energy prices.

The average rate for a new two-year loan is currently 5.91%, a significant increase from December 2021 when rates as low as 1.1% were available. The rise in Sonia swap rates, used by lenders to price fixed-rate mortgages, has increased the cost of providing loans.

The Bank's data indicates that average rates on outstanding mortgages have not been this high since it began collecting this specific data in 2016. However, a similar dataset shows that average outstanding mortgage rates last exceeded 4% in February 2009.

Financial experts suggest that government intervention is crucial. Julie Palmer, managing partner at BTG, emphasized the need for the government to address interest rates, affordability, and stamp duty reforms in the upcoming budget to reduce borrowing costs.

The number of mortgages approved for house purchases has also fallen to its lowest level since December 2023. Higher mortgage rates have discouraged people from moving, particularly those looking to purchase larger homes and increase their borrowing. Economic uncertainty, the removal of stamp duty incentives, and a subdued housing market have also contributed to this trend.

In August, just under 55,000 purchase loans were approved, marking the fourth consecutive month below 60,000. Analysis by estate agent Savills indicates a 13% decrease in mortgage approvals compared to the same period last year, with 33,086 fewer approvals over the four months to August.

Lucian Cook, head of residential research at Savills, noted that market volatility has made larger mortgages more expensive. He added that the lack of housing wealth accumulated by homeowners in recent years, coupled with pressure on house prices since September 2022, is causing potential buyers, especially those looking to upsize, to postpone their plans until they feel more confident about their financial stability and ability to service increased debt.

The government's 'Your First Home' scheme, announced recently, aims to support the housing market by allowing first-time buyers to purchase a home with a 2.5% deposit and an equity loan of 20% of the property's value. However, experts suggest that a more substantial impact would come from lower mortgage rates.

Simon Gammon, managing partner at Knight Frank Finance, stated that while the first-time buyer scheme may boost sentiment in more affordable areas, mortgage rates remain the primary constraint. He believes that a significant recovery in transaction volumes will likely require sustained improvement in borrowing costs.