11 Nov 2020

Mortgage Rates are Going Up – The Reasons and Challenges for Homebuyers


Mortgage lenders are currently raising their interest rates, in a bid to cope with heightened demand.

Moneyfacts data shows that typical mortgage rates have been steadily rising since July. The average 2-year fix to 85% LTV for example has gone up by more than an entire percent, from 2.11% in July to 3.12% in November, data from Moneyfacts shows.

This is despite the Bank of England interest rate standing at just 0.1%, the lowest it’s ever been.

Lender activity

Halifax, TSB, Nationwide, NatWest, Barclays, and Yorkshire and Chelsea building societies are just some lenders to have raised interest rates, the Financial Times reported.

Some lenders are also pulling products altogether. For example, Santander withdrew its 85% LTV 2-year fixes from the market.

Of course, if mainstream lenders pull their products, that likely results in the average mortgage rate increases, as a greater proportion of the market is occupied by a more expensive specialist or adverse credit lenders.

Why raise mortgage rates

With widespread news of the mortgage market grinding to a halt in recent months, lenders increasing their rates perhaps shouldn’t be too surprising.

Britain’s banks and building societies are struggling to cope with the quantity of business they are receiving, so raising mortgage rates allows them to reduce the amount they get until their service levels improve.

The issue is a number of lenders are applying the same strategy, resulting in something of a race to the top in terms of interest rates.

Too much business

There’s been especially busy activity caused by the stamp duty holiday, which enables people to save up to £15,000 when they buy property until March 2021.

Reportedly lenders are having to cope with double the normal number of applications, so it’s no wonder that they’re struggling to get things done fast.

The number of mortgage approvals for house purchases increased to 91,500 in September, a 13-year high for the month, Bank of England data shows.

Impact of the pandemic

The pandemic has impacted the time it takes for people to get a mortgage.

Having such a major proportion of staff working remotely may have caused lenders to operate more slowly.

Meanwhile arranging to get a survey done is more sensitive when people are worried about being in close proximity with one another.

In early November Legal & General recommended for people to start their homebuying journey immediately to avoid missing out on the stamp duty holiday deadline – owing to the above factors.

Lack of low deposit mortgages

Seeing as lenders are being more cautious due to the destabilising impact of the pandemic, the availability of mortgages with a 5 or 10% deposit is also sparse.

This means lenders who have remained in those markets have had to cope with even more business. 

Indeed, Nationwide publicly admitted in October that offering 90% mortgages has heightened the number of applications it was receiving, causing delays.

Mortgage recommendations

In the current climate if you get a low mortgage offer we’d recommend you take it, given that rates are only going one way at the moment.

If you’ve not yet applied for a mortgage you’ve got the best chance of getting a good deal by speaking to a mortgage broker, seeing as it’s their job to be familiar on what rates lenders are offering on any given day.

Frustrating times for homebuyers

As we’ve explored, lenders aren’t simply raising interest rates to profiteer, they don’t want to accept business they can’t handle.

However potential buyers are likely to be frustrated, as they’re being forced to pay a higher interest rate per month in order to take advantage of the stamp duty holiday.

It might be that this can’t be avoided. 

On the upside, if you take out a short-term mortgage like a 2-year fix with a relatively high-interest rate, if you remortgage in two years’ time it’s plausible that you could improve the rate then when the market is likely to be slower.

If you’re looking to buy now before the stamp duty holiday comes into force, it could still be worth it, even if you’re forced to pay more for your mortgage than three months ago. 

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