The years since the financial crisis have been a boon for homeowners as mortgage rates have fallen to historic lows.
Banks and building societies have rushed to slash the cost of their loans, with some providers offering rates of less than 1% in the past couple of years. However, there are signs that the mortgage market has bottomed out and the cost of taking out a loan has started to rise.
Data from Moneyfacts shows that 21 providers increased their mortgage rates during the fi rst week of October, with the average two-year fi x going up by 0.04% to 2.24%. This may seem like a small rise, but there are signs that financial markets are pricing in further increases in the near future.
At the time of writing, the Bank of England base rate remains at 0.25%, but interest swap rates have risen significantly in anticipation of a rate rise. Between September and October this year, the average two-year swap rate rocketed from 0.54% to 0.82%.
Swap rates show the rate at which banks expect to be able to borrow and lend in future. A rise in the swap rate will usually be followed by an increase in the interest rates charged to consumers, although there are many other factors at play.
Charlotte Nelson, finance expert at Moneyfacts, says: “In the past few years, the link between mortgage rates and swap rates appeared to be broken, not only due to the volatility of the rates but also the fierce competition among lenders in the mortgage market.
“However, the substantial increase in the swap rate seen in the past few weeks has quickly changed this, with 21 providers upping their rates since 12 September.
“Providers are starting to factor swap rate rises into their pricing, causing the average two-year fixed rate to start creeping up, and this new trend is showing no signs of abating yet.”
Crunch time for borrowers
Homeowners are being urged to remortgage and lock in a low rate before more banks and building societies follow suit and increase their rates.
“As soon as base rate goes up, expect the vast majority of lenders to push on the increase immediately,” says Aaron Strutt, mortgage broker at adviser firm Trinity Financial.
“In the past, we thought rates had bottomed out and then they fell again, but now it is hard for them to fall much further.”
As recently as October 2012, the average rate charged for a two-year fi x was 4.45%. But this has dropped by more than 2% in the past five years to its current level of 2.24%, the Moneyfacts data shows.
Mr Strutt says that many homeowners have been sitting on standard variable rates (SVRs) of between 4% and 5% and these are the customers who can cut their monthly payments the most.
Moneywise research shows that a homeowner with a £100,000 mortgage could cut their repayments by more than £100 a month by remortgaging. A borrower paying a rate of 4% would see their monthly repayments drop from £528 to £424 if they were to switch to a mortgage charging 2%.
“There’s so much choice in the market,” says Mr Strutt. “You can now get a five-year fi x for comfortably below 2% in many cases.
“If your mortgage deal is coming to an end or you’re sat on a lender’s SVR, then the super-cheap, five-year fixes are a great option. Plus many lenders are throwing in free legal and free valuations for remortgage customers.”
Miss Nelson encourages consumers to take advantage soon. “It is crunch time for borrowers looking to remortgage,” she adds. “It is vital they act fast to ensure they get the best possible deal before their rates increase.”