June 18, 2024

The average mortgage rate for a two-year fixed deal has risen to above 6 per cent, according to financial analysts.

Moneyfacts, the financial information company, said the figure of 6.01 per cent represented the highest since December 1, when the market was affected by measures included in the Truss government’s mini-budget.

The average five-year fixed mortgage rate deal has increased to 5.67 per cent — up from 5.62 per cent on Friday. The base interest rate, set by the Bank of England, is 4.5 per cent but looks set to rise to at least 4.75 per cent this week, the highest level since 2008.

With many homeowners on a fixed-rate mortgage the rate rise means many could be unable to afford their property when their deal expires. The Treasury has ruled out a mortgage relief fund for struggling homeowners, fearing it could exacerbate inflation and drive interest rates higher.

Michael Gove, the levelling-up secretary, insisted yesterday that it was better to get to the “root cause” of rising borrowing costs by cracking down on inflation. A Treasury source said such a fund would be “totally self-defeating”.

Ministers are working with banks to look at options such as payment holidays or extended terms to ease the pain for those dealing with soaring monthly payments, but are resisting pleas from opposition parties to offer direct help.

A year ago, borrowers could get a two-year, fixed-rate mortgage for 3.14 per cent but this week, the same deal costs 5.98 per cent.

A Treasury source said: “Borrowing money to subsidise mortgages risks fuelling inflation further, forcing the Bank of England to respond with higher interest rates. It would be totally self-defeating,” . “The single most effective policy to help mortgage holders is to bear down on inflation, thereby limiting interest rate rises.”

Ministers believe that subsidising mortgage payments would also benefit wealthier homeowners, making it harder for first-time buyers to get on the housing ladder. Any relief scheme would also require borrowing at a time when government debt interest payments are rising and Jeremy Hunt, the chancellor, is desperate to find headroom to cut taxes next year.

Gove told BBC1’s Sunday with Laura Kuenssberg: “If you spend public money in order to deal with particular crises, you are inevitably adding to the stock of debt. And if you add to the stock of debt, that puts pressure on interest rates. The worst thing to do would be to spend money in order to provide short-term relief, which would mean . . . overall finances are in a weaker position.”

The ruling out of mortgage support came as the first signs emerged that the turmoil in the mortgage market is beginning to weigh on the housing market. Average asking prices dropped by £82 — the equivalent of 0.02 per cent — in the month to the middle of June, according to Rightmove. The listings website said the decline was the first fall in prices this year and the first time prices have fallen in June since 2017.

The average property in the UK now costs £372,812, just 1.1 per cent higher than a year ago. Rightmove predicted further falls over the next few months due to the “significant” increases in the cost of mortgage rates in past weeks. By the end of the year, it expects asking prices to have fallen by 2 per cent.

Despite the turmoil in the mortgage market, the website said buyer demand remained resilient. Over the last two weeks it was still 6 per cent higher than the same period in 2019 although “more pricing realism” from new sellers had brought forward the usual summer slowdown. The biggest fall in asking prices over the last month came in London, where they fell by 1.6 per cent. However, this masks some considerable variation between boroughs.

Kingston upon Thames was up 3 per cent while Harrow was down 1.9 per cent. Elsewhere, the northeast was the biggest gainer in the month, rising by 4.9 per cent. Tim Bannister of Rightmove said: “It remains to be seen how movers will respond to the expected further rate rises.”

Yesterday, a former deputy governor of the Bank of England predicted the base rate could rise from its current position of 4.5 per cent to nearly 6 per cent. Sir Charlie Bean told Sky News: “It’s certainly a tricky situation at the moment for the bank and for the government . . . because inflation has been stubbornly high.”

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Two-year fixed rate mortgages rise to more than 6%