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Mortgage borrowers coming to the end of a five-year fixed-rate loan face a much greater “payment shock” than those refinancing a two-year deal, according to research.
The UK mortgage market has been in turmoil since the start of war in the Middle East, as rising gilt yields and swap rates raised the costs of wholesale funding for lenders and scotched investors’ previous expectations of a gradual reduction in rates over the coming year. Lenders have pulled swaths of their deals, replacing many of them with costlier loans.
A bulge of borrowers now faces the task of refinancing under these conditions. Analysis by UK Finance, the industry body, found that 1.8mn people on a fixed-rate mortgage will see their fixes expire in 2026. Of these, by far the largest tranches are those who borrowed in 2021 and 2024, on five- and two-year fixes respectively.
Those who fixed five years ago — 28 per cent of the total facing refinancing this year — at that time enjoyed a benign environment for borrowing, with the Bank of England’s official interest rate standing at 0.1 per cent. These borrowers are currently paying interest at 2.35 per cent on average, compared with 4.87 per cent for those who fixed for two years in 2024.
“The scale of the challenge for those with fixed-rate deals expiring this year is therefore very different, depending on when they took out their previous loan,” said James Tatch, head of analytics at UK Finance and author of the report.
Using mortgage rates available last week, Tatch calculated that those now refinancing a fixed deal taken out in 2024 would face a small rise in interest payments of £37 a month on average, to a total payment of £906 a month. But those who were on five-year deals from 2021 will confront an increase of £395 a month, albeit to a lower average total of £722.
“Payment shock is inevitable for those who take out fixed-rate loans at a time of low rates and then look to refinance in a higher-rate environment,” he said.
Finance site Moneyfacts said on Wednesday that the lowest mortgage rates had jumped from 3.51 per cent a month ago to 4.6 per cent, adding around £150 a month or over £1,810 a year on to a £250,000 loan.
“It has been just over a month since the start of the Middle East conflict, and the impact on borrowers has been almost immediate as borrowing costs sharply rose,” said Caitlyn Eastell, personal finance analyst at Moneyfacts.
Nonetheless, the UK Finance analysis found that 94 per cent of borrowers with fixed-rate deals of whichever vintage expiring this year would — under current conditions — be able to refinance on to rates below the stress test limit of their current loan. Mortgage lenders are obliged to undertake stress tests on all new borrowers to assess their ability to repay the loan if the interest rate rises significantly in future.
The six per cent (115,000 borrowers) who would currently fail the stress test are predominantly made up of those who took out a five-year deal in 2021 (just under 80,000 borrowers).
Tatch said inflation had brought financial pressures on households over the past five years, with prices for energy and food rising steeply. But in some cases, he added, this would be offset by rising wage growth over the period, and inflation’s tendency to erode the real-terms value of a mortgage. “Customers will have commensurately greater ability to absorb these higher payments,” he said.
For those who cannot, but have not fallen into arrears, there is the option of a product transfer. Here, a borrower remains with their existing lender, moving on to a higher rate but with no need to submit to a stress test. Though payments will probably rise, this allows the borrower to refinance and remain in their property, albeit at greater cost.
“Refinancing on to a product transfer is not stress-tested . . . so there’s no problem with the ability to refinance. [But] there’s a constrained ability to refinance on the open market,” Tatch said.
UK Finance said its calculations were based on each customer’s current indexed loan-to-value ratio, their loan balance and the best rate available to them for that LTV as of March 23. Many lenders have subsequently raised their fixed rates, including Barclays, Nationwide and Halifax this week.
