September 23rd marked a year since Kwasi Kwarteng’s disastrous mini-budget, which prompted the pound to plummet and borrowing costs, inflation, and swap rates all to soar, triggering mortgage market mayhem.
Immediately following the announcement, lenders started temporarily pulling many of their mortgages from the shelves, with 40% of deals disappearing within a week. Many mortgages were subsequently replaced with much higher rate deals, not seen at that level since the 2008 financial crisis.
For example, average two-year fixed rates from the top 10 lenders stood at 3.66% prior to the mini-budget, but the month after had jumped to 5.24%. The past year has seen several base rate increases in a bid to curb rampant inflation, and as a result mortgage rates remain high, with the average two-year fix from the top 10 lenders at the beginning of this month at 5.99%.
Similarly, the average five-year fix went from 3.58% prior to the mini-budget to 4.97% afterwards, and is currently at 5.42%. These dramatic jumps in rates have added hundreds, and often thousands of pounds, to annual mortgage costs when borrowers come to remortgage.
For example, a homeowner with a £150,000 repayment mortgage over 25 years would be paying £763.87 a month at a 3.66% two-year fixed rate, but monthly payments would jump to £965.54 on the same mortgage on a 5.99% fixed rate today, a difference of £201.67 a month, or an extra £2,420 over a year.
If the same homeowner had locked into a five-year fixed rate at 3.58%, their monthly payments would be £757.39, but the same mortgage at today’s average 5.42% fixed rate, would increase to £913.98, equivalent to an extra £156.59 a month or £1,879 a year.
Outlook for mortgages
Mortgage rates remain much higher than they were prior to the mini-budget, but with inflation gradually starting to ease and swap rates reducing in recent weeks, several lenders have cut their mortgage rates, and may continue to do so if inflation continues to fall.
Interestingly, even though the base rate is currently much higher than it was in the aftermath of the mini-budget - it is currently 5.25% compared to 3% in November 2022 – mortgage rates aren’t that dissimilar now compared to then. For example, the average two-year rate post-mini-budget stood at 5.90% compared to 5.99% at the beginning of September, and the average five-year fixed rate is 5.42%, compared to 5.67% after the mini-budget.
Hopefully we may be entering a period of greater stability compared to the rollercoaster ride of the previous year (although there are no guarantees), but if you are approaching the end of your current fixed rate deal, it’s really important to find the best possible remortgage deal to help keep your costs down. Shopping around and seeking advice to understand all the available options will help avoid paying more than you need to.