Why are lenders increasing UK mortgage rates?

Mortgage rates symbolised by rising line graph

Mortgage rates are going up again - but is it entirely down to interest rates?

(Image credit: Getty Images)

last updated 2 May 2024

Homeowners and prospective buyers have been hit this week by further increases to mortgage rates.

Some of the UK’s biggest lenders, including NatWest, Santander and Nationwide, hiked mortgage rates on two and five-year fixed deals by more than 0.2 percentage points on Monday (29 April). Santander followed this up with another set of 0.2% hikes on Thursday (2 May).

The slight uptick in rates since late February has already had an impact on the housing market. Nationwide’s most recent House Prices Index found house prices fell again in April as a result of the hikes. Meanwhile, Go.Compare research has found affordability remains an issue more generally - particularly in southern parts of England.

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At least some of the blame lies with the 16-year high Bank of England interest rate. Swap rates, which are highly sensitive to any market uncertainty, soared earlier this month when the monthly average wage growth and headline inflation datasets came in hotter than expected.

It was feared both economic indicators would mean the UK central bank would opt to delay cuts to the base rate in a bid to ensure consumer price inflation gets back to its 2% target. But is the Bank of England entirely to blame for the rise in mortgage rates we’re currently seeing?

How much have mortgage rates risen?

According to rate comparison website Moneyfacts, average rates sat at 5.91% for a two-year fix and 5.49% for a five-year deal as of Thursday (2 May). It means rates have crept up by almost half a percentage point over the last two months.

Mortgage fixes had been trending downwards in January and February ahead of expected bank rate cuts. While the gradual change of direction and the number of lenders upping their rates has created a bit of panic, especially for the 1.5 million households who will have to remortgage at some point in 2024, there is an important caveat to note.

Current rates are still well-below the highs seen over the summer of 2023. Last August, two-year rates threatened to top 7% and remained north of 6% until the new year. Meanwhile, five-year deals came in at almost 6.4% at their peak. Also, not all providers are hiking rates. For example, on Tuesday, Skipton Building Society said it was cutting some of its fixed and tracker products, and relaunching its high loan-to-value (LTV) products.

The other important thing to note is that the amount of products to choose from has risen. As of 30 April, there were 6,546 residential mortgage products to choose from. Not only was this 2% (150 products) higher than the previous day’s tally, but it’s almost six-times the number that were available to consumers in the wake of Liz Truss’s mini-Budget, when lenders pulled deals at a rapid rate.

Why are mortgage rates rising?

Some of the blame for the increase in mortgage rates can be blamed on the ongoing uncertainty over when the Bank of England will cut its interest rate. Last week, Danny Belton, head of lending at Mortgage Advice Bureau, told MoneyWeek that “swap rates have ticked up slightly on Bank of England interest rate expectations, and this is prompting a shift in the market."

Nicholas Mendes, mortgage technical director at broker John Charcol echoed Belton, adding: "The market is in dire need of some positive movement from the Bank of England. Until we see a rate reduction we're going to see a period of rate increases as markets start to be unsettled.”

This uncertainty was only increased by separate, contradictory speeches from senior figures at the Bank of England. Deputy governor Dave Ramsden suggested inflation - the economic force the central bank attempts to control through interest rates - was not as embedded in the UK economy as had been feared. Days later, the Bank’s chief economist Huw Pill said interest rate cuts remained “some way off”.

While this explains some of the upward shift in mortgage rates, another factor is also contributing to the rate hikes we’re seeing. Mortgage adviser at Ash Ridge, Jane King, told MoneyWeek that lenders were trying to avoid a surge in customer numbers. Most people who are due to remortgage can lock in a rate up to six months ahead of their current fix expiring, and hop onto cheaper rates when they become available.

She said: “I was told by one lender that they cannot reduce rates now as they have to be wary of borrowers ‘waiting’ with offers, product transfers, etc. on rates that were higher a few months back. If they drop rates too much a lot of these borrowers will ditch their current rate in a stampede to switch to the lower rate.

“I myself have a long list of clients who want to jump to a lower rate if rates reduce. This will cause a mass of additional administration which no doubt the lenders want to avoid as we go into the busy spring market. Therefore at the moment it makes sense for lenders to keep rates higher until this concern subsides.”

Should you fix your mortgage?

While mortgage rates are on the up, the expectation is that we’re heading towards an interest rate cutting cycle. The markets currently believe that when the Bank of England makes its first cut, mortgage rates will start to come down. Expectations of how soon and how fast the central bank will go are split, with some saying we’ll see significant cuts from June and others expecting smaller reductions later in the summer.

In the here and now, the expectation is that fixed rates will remain high. As you’ll have read higher up in this piece, you can lock in a rate now and switch to a cheaper one closer to your current deal’s expiry date. But, if you’re not happy with any of the deals at your disposal, how do the alternatives compare?

According to Moneyfacts, the average two-year tracker mortgage - a deal that goes up or down depending on the Bank Rate - is sitting at 6.12%. Meanwhile, the typical standard variable rate (SVR) - the type of deal you roll onto if your fix expires - sits at 8.18%.

Tracker mortgages tend to be more flexible than fixes as you can usually break out of them more easily. When interest rates fall, tracker rates also tend to reduce more quickly than fixes. The other option - an SVR - offers even more flexibility, but you’ll currently be paying a significantly higher rate.

So, what should you do if you’re coming to the end of your deal? John Charcol’s Nicholas Mendes says: “Given the nature of the market, those who may be hesitant to commit to a deal should continue to reach out to a broker and discuss options.

“While we anticipate a reduction in fixed rates, the timeline for this adjustment may be somewhat longer than initially expected. It is important to note that, even if you secure a deal, there is still flexibility to make changes close to completion should a more favourable offer become available.”

Henry Sandercock has spent more than eight years as a journalist covering a wide variety of beats. Having studied for an MA in journalism at the University of Kent, he started his career in the garden of England as a reporter for local TV channel KMTV.

Henry then worked at the BBC for three years as a radio producer - mostly on BBC Radio 2 with Jeremy Vine, but also on major BBC Radio 4 programmes like The World at One, PM and Broadcasting House. Switching to print media, he covered fresh foods for respected magazine The Grocer for two years.

After moving to NationalWorld.com - a national news site run by the publisher of The Scotsman and Yorkshire Post - Henry began reporting on the cost of living crisis, becoming the title’s money editor in early 2023. He covered everything from the energy crisis to scams, and inflation. You will now find him writing for MoneyWeek. Away from work, Henry lives in Edinburgh with his partner and their whippet Whisper.