Homeowners have suffered a £200-a-month increase in their mortgage repayments as interest rates approach a 10-year high.
The average rate for a two-year fixed-rate mortgage rose to 4.09%, its highest level since February 2013, according to analyst Moneyfacts. The higher cost of borrowing follows six consecutive increases in the bank rate since December last year, after a decade of historically low rates.
A year ago, the two-year average fix was available at a rate of 2.45%. This means that the average monthly repayment of a £250,000 mortgage will have risen from £1,115 to £1,332 over the past year, an increase of £217 per month.
Mark Harris, of brokerage SPF Private Clients, said higher two-year rates would come as a “huge shock” to homeowners who had repaired their mortgages during the pandemic and would be forced to take much more expensive offers.
Across the market, around 1.3million homeowners will come to the end of their fixed rate mortgage contracts this year, according to UK Finance, the banking trade body.
About 500,000 homeowners took out two-year fixed-rate loans when the bank rate was at an all-time high of 0.1% during the pandemic, and mortgage rates were as low as 1%.
Mr Harris said: “This is going to be a big surprise for people who are about to leave their fixed agreements. It will strike just as households grapple with other elements of the cost of living crisis, including rising energy and food bills.
Inflation, which hit a 40-year high of 10.1% in July, is expected to reach 13% by the end of this year. Meanwhile, forecasts suggest the energy price cap will rise 81% in October to £3,576.
Homeowners paying down this year could see their disposable income fall by more than a quarter due to the twin hits of inflation and rising mortgage rates, UK Finance has warned.
Kim Barrett, an independent financial adviser, said managing mortgage costs was crucial for households. While the two-year agreements offered greater flexibility, he generally advised his clients to settle their mortgages for as long as possible.
“People are inclined to buy the cheapest fares on the market, which are usually variable,” he said. “But that can be a mistake. Short-term fixed and variable contracts give you exposure to the market when it is volatile. »
Mr Barrett said young homeowners should fix their mortgages for as long as possible, especially as their earning potential would likely increase steadily over the course of their careers. “If you can afford it now, your mortgage should become more affordable over time,” he said.
However, as the cost of borrowing has steadily risen, the big blue chip banks have failed to pass on the higher rates to savers. The average rate on an easy-to-access savings account is 0.74%, Moneyfacts said. However, the bank rate has increased to 1.75% and some market watchers expect it to reach 3% by the end of this year.
Savings rates have remained low over the past decade. The last time the average easy-to-access account offered a better rate was in March 2013, according to Moneyfacts.
While savings rates have improved in recent months, savers still have no hope of earning a rate close to inflation. This means that their money will continue to lose its real value.
For example, a deposit of £10,000 saved in the standard average account would earn £74 a year in interest. But after taking into account the impact of inflation, she would lose £850 of her purchasing power.