Mortgage rates could rise faster than 2008 crisis – what to do to keep costs low

Experts think soaring inflation could drag homeloan costs up too, but the good news is rates are currently low for homeowners able to lock in to the cheapest deals

Homeowners could be in line for the largest hike in mortgage costs since the 2008 property crash, experts warn.

This is because the Bank of England could increase base rate to control rising inflation .

Base rate is set by the Bank and factored in to many financial deals, including mortgage payments. If it goes up, mortgage rates do too.

Bank of England governor Andrew Bailey warned last week that this rate could rise next year. It is currently at record lows of 0.1%.

Around 2million homes are on variable-rate homeloans, meaning a change to base rate would be passed on straight away.

The rest are on fixed-rate deals, where prices are set for the duration – normally two or five years.

But rising base rate means the cost of new fixed rate mortgages rise too, so all homeowners would face higher prices eventually.

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Mortgage lenders can also tweak their pricing in anticipation of the Bank of England changing base rate.

Samuel Tombs, economist at Pantheon Macroeconomics, said: “Our biggest concern is that the rise in mortgage rates implied by markets’ expectations for the bank rate [another term for base rate] would have a bigger impact on the economy via the housing market.”

Experts expect a typical two-year fixed rate mortgage would rise by 0.5% to 1.7% by the end of next year, according to the Telegraph .

This would add £50 a month to the average £200,000 mortgage.

How to get the cheapest mortgage

Homeowners are being urged to consider locking in with a low fixed rate mortgage to help weather any price rises.

But homeowners could hedge against this by taking out a fixed-rate mortgage, which are currently extremely cheap.

Nick Mendes, of mortgage broker John Charcol, said people coming to the end of a fixed-term loan should remember they can lock in with one of these super-cheap mortgage before their term expires.

Doing this soon would mean being protected for a bit longer if base rate does go up next year – and mortgage rates with it.

Speaking to The Mirror last week, Mendes said: “When you come to the end of your fixed rate, you can go to a lender and fix a deal six months in advance,” he said. “Being able to prepare and look at your options now is important.”

This year has seen a succession of super-cheap homeloans.

In August Nationwide released a 0.99% two-year fixed rate – the cheapest ever, at the time.

This was followed by Halifax at 0.98%, which it then slashed to 0.9% and then 0.83% – before Platform went even lower.

Why have mortgage rates been so low?

The Bank of England base rate has been low since 2020 – but lenders did not pass it on until this year.

There are several reasons why homeloans suddenly became so cheap.

Firstly lenders may have been worried about their own profits during the worst of the coronavirus outbreak, and not feeling particularly generous.

But experts also think mortgage lenders are being super-competitive with lower-deposit mortgages to balance out the rush of riskier first-time buyer mortgages this year.

Banks see first-time buyers as much more likely to default on mortgages, as they tend to borrow higher amounts.

Not only that but they are often younger and less established in their careers.

There have been a lot of first-time buyers this year because in April the government launched Treasury-backed 95% mortgages.

Under the government guarantee scheme, banks and building societies offer mortgages to borrowers with just a 5% deposit, with the government acting as the guarantor if the buyer defaults on their payments.