Mortgage rates at a five-month high are confronting borrowers just as the Bank of England‘s Monetary Policy Committee (MPC) prepares to meet this week, with more than 25 lenders having raised their rates in the past seven days, among them HSBC, Lloyds and Nationwide. The repricing has pushed the average two-year fixed mortgage to 5.67 per cent, its highest level since June, while the average five-year fix has reached 5.72 per cent, a level last seen in April.
Mortgage Rates at a Five-Month High: What Is Driving the Rises
The immediate cause is a shift in swap rates, which lenders use as a primary benchmark when pricing fixed-rate deals. Swap rates reflect market expectations for interest rates over two, five or ten-year periods, and they have moved sharply upward in recent weeks. According to HOA, the rise in swap rates followed the outbreak of the Middle East conflict, as predictions of interest rate cuts gave way to forecasts of rate increases instead.
Adam French, head of consumer finance at Moneyfacts, said the repricing by lenders was itself lagging the earlier swap rate moves. ‘Mortgage rates have only just caught up with earlier increases in swap rates, meaning lenders will now face further pressure to reprice,’ he said. ‘Unless swap rates fall back significantly, borrowers need to be prepared for further mortgage rate increases in the weeks ahead.’
The European Central Bank added to the pressure last week by raising its base rate to 2.5 per cent, a move French said had ‘strengthened market expectations that other central banks, including the Bank of England, could also be forced to raise rates in the months ahead’.
MPC Decision and the November Question
The MPC is expected to leave rates unchanged at 3.75 per cent at its meeting on Thursday, according to Mojo Mortgages, following the rate being held at its most recent meeting on 30 July. But economists across the City have begun pricing in the potential for a hike in November, driven by renewed inflationary pressures linked to the US-Iran war.
The longer-term trajectory of UK rates remains a matter of debate. The Bank has said the rate has peaked and predicted it was likely to fall ‘close to 3% early next year’ before gradually returning towards 2% in 2027, according to the BBC. That projection sits uncomfortably alongside the renewed upward pressure on swap rates, which the HOA notes have moved in the opposite direction since the Middle East conflict began.
For now, borrowers watching that longer-term forecast must contend with rates moving higher in the near term, not lower.
Lending Data Weakens as Market Feels the Strain
The strain on the mortgage market is visible in lending data. UK mortgage approvals fell to 56,100 in July, down from 58,200 the month before, according to figures from the Bank of England. Net mortgage borrowing also dropped sharply, from £7.7bn to £4.3bn, with the Bank citing the economic impact of the war beginning to trickle through into household borrowing behaviour.
The effects are not confined to house purchases. Property portal Zoopla has forecast that annual price growth in the UK rental sector will reach four to five per cent this year, a consequence of elevated mortgage rates pushing potential buyers into rented accommodation for longer and squeezing available supply.
Richard Donnell, executive director at Zoopla, said the dynamic was compounding seasonal pressures in the lettings market. ‘Higher mortgage rates are not just impacting the sales market, they are keeping more would-be first-time buyers in rented homes for longer, reducing available supply just as the seasonal upturn in demand gets into full swing,’ he said.
The MPC’s decision on Thursday will not resolve the swap rate pressures that are already feeding through to fixed-rate deals. With the European Central Bank having moved last week and economists weighing the odds of a November rise in the UK, lenders are unlikely to hold their current pricing steady for long regardless of the outcome.
