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Rising rates in the UK mortgage market have pushed borrowers towards shorter-term options, such as tracker loans and two-year fixes, while some buyers are pausing their purchases, brokers and agents said.
The cost of a home loan has risen sharply over the past month as the Middle East war pushed up gilt yields and swap rates, which lenders use to guide their pricing of fixed-rate deals.
The average interest rate on a two-year fixed-rate deal is at its highest level in nearly two years, at 5.90 per cent, according to finance site Moneyfacts, up from 4.83 per cent at the start of March. Five-year deals are slightly cheaper than those for two, at 5.78 per cent.
In spite of marginally better rates for longer fixes, more borrowers are choosing two-year deals in the hope of an improved outlook in the medium term, brokers said.
Andrew Montlake, managing director of broker Coreco, said clients had become “more short-termist” in their approach. “Quite a few people believe that rates where they are now isn’t a long-term thing. It could get worse before it gets better, but they assume that we won’t still be at war in two years’ time.”
Tracker mortgages tied to the Bank of England’s official rate or discounted variable rates linked to the lender’s standard variable rate have also attracted interest, since they remain significantly cheaper than two- or five-year fixed rates.
Adrian Anderson, managing director of broker Anderson Harris, said one client seeking a £500,000 mortgage had chosen a tracker at 3.96 per cent with Halifax, after seeing that the cheapest two-year fix he could secure was around 4.85 per cent.
“It is higher risk but so much cheaper. While lenders have all increased fixed-rate pricing by quite a significant amount, they haven’t changed the margins on variable trackers by that much. It would need around three Bank of England quarter point base rate rises to get to where the two-year fix currently is.”
In a volatile climate, another appeal of variable-rate products is that borrowers are free to move out of them to another type of mortgage at any time without incurring penalties, and they typically allow borrowers to make unlimited overpayments.
“Some have gone for trackers not because they think interest rates are going to fall,” said Simon Gammon, managing partner at Knight Frank Finance. “Let’s say they think they’re probably going to sell their house in the next couple of years. They need flexibility as a priority rather than locking in.”
Signs are emerging of dampened activity in the broader housing market. An index of market sentiment among estate agents and surveyors by the Royal Institution of Chartered Surveyors this week found weaker buyer demand in March, as well as in agreed sales and sales expectations. New buyer inquiries slipped to their lowest net position since August 2023, “with most parts of the UK seeing a noticeable deterioration over the past couple of months”, Rics said.
Rics said “some renewed downward pressure” on house prices was emerging, “albeit still relatively moderate”. Meanwhile, the Halifax house price index this week showed house prices fell by 0.5 per cent in March on the heels of a 0.3 per cent increase in February. “The pace of annual growth has also eased, slowing to 0.8 per cent from 1.2 per cent the previous month, suggesting the market has lost some momentum as spring begins,” Halifax said.
Roarie Scarisbrick, a partner at buying agent Property Vision, said some buyers were taking a breath as they contemplated much higher financing costs. “Over the last few weeks mortgage interest rates have been a primary topic of conversation among the buyers I’ve seen. It’s clipping the wings of a few buyers because nobody wants to lock in at what feels like pretty high fixed rates at the moment.”
Anderson, the broker, anticipated fewer introductions from estate agents and buying agents over the coming weeks. “Buyers will be a bit more cautious in terms of what they may offer. And some sellers might hold off because they may feel it’s not the right time to get the best price.”
He described a homebuyer who informally sought his advice on his options after an earlier application for a five-year fix at 3.85 per cent, obtained elsewhere, looked at risk of falling through. On the £1.5mn loan he was seeking, the original rate would have translated to monthly payments of £4,800. “But if he has to make a new application, the new rate’s going to be 4.8 per cent — or £6,000 a month.”
As a result, the buyer was minded to halt the purchase if the original application failed. “That will definitely be the mindset more broadly,” Anderson said. “Some people will put the brakes on viewings.”
