Mortgage lenders have been gradually raising prices in response to rising swap rates, which have been driven up by events in the Middle East.
But this week Virgin Money announced its biggest ever price rise – up 0.7%. Santander also revealed it was increasing rates by up to 0.53%.
Subsequently, HSBC and Santander revealed that they were reducing the maximum size of mortgage loans to stay within legal rules.
It means that borrowers who would previously have benefited from relaxed affordability tests will see things become stricter. Instead of being offered loans of 5.5 or six times their salary, they will be limited to borrowing around 4.5 times their salary, which is the industry norm.
Aaron Strutt, product and communications director at Trinity Financial, said: “A multiple of 5.5 or six times salary income is probably OK if interest rates are below 4%, but if they get closer to 5% it’s easier to see how borrowers could struggle.
“Despite fixed interest rates becoming much more expensive, underwriting criteria for mortgages have generally remained the same, but as the financial fallout from the war continues, lenders must respond.”
How much did mortgage prices rise in March?
Both the interest rate increases and affordability changes will be a blow to borrowers looking for a mortgage deal – to buy a home or to take out a new mortgage.
At the beginning of March, just before the conflict broke out, Moneyfacts’ average mortgage interest rate was 4.89%. Lenders had cut prices and markets predicted another rate cut was on the way.
But following the rise in oil prices, swap rates, which lenders use to set their prices, have soared, causing fixed-rate mortgages to rise in price.
It means that the Moneyfacts Average reached the benchmark of 5.50% on Wednesday, March 25 at 4:30 PM.
The last time it was this high or higher was in August 2024. At the time, the base rate was 125 basis points higher at 5.00%, but inflation was 2.2% and the market consensus was that rates were on a downward trend.
Adam French, head of consumer finance at Moneyfactscompare.co.uk, said this marked another “unwelcome milestone” for borrowers this month.
“These rising costs are a direct response to the conflict in the Middle East, which has dramatically changed market expectations around inflation and future interest rates, with lenders struggling to keep up with rising borrowing costs.
“Moneyfacts’ analysis of more than 30 years of historical interest rate data shows that mortgage rates have historically averaged around 1.5-1.75 percentage points above the base rate. If a few rate hikes materialize, as markets are currently predicting, this could lead to the overall average mortgage rate stabilizing around 5.75%-6.00%.
“This would leave borrowers paying £1,500 to £2,000 more per year on an average mortgage compared to just a few weeks ago. However, given the volatility of events, this is subject to change in either direction.”
What is the advice to mortgage providers?
Borrowers locked into a fixed rate will be protected from further increases until their deal expires. For anyone who is about to apply for a mortgage or who is in the process: the guidance of your mortgage advisor is now crucial.
Dariusz Karpowicz, director of Doncaster-based Albion financial advicespeaking to the Newspage agency, said: “When no one wants to be the cheapest at the best buy tables, you know the mood has shifted from caution to outright fear. The real question is whether this is 2008 again or just a brutal correction.”
“Either way, products are disappearing every day, interest rates are rising by the hour, and hesitating borrowers are paying for it. If you’re in the middle of applying, lock in your rate today. Tomorrow’s price is anyone’s guess.”