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Why have interest rates gone up and how will it affect your mortgage?

UK interest rates have been rising in recent months as the Bank of England battles to tame inflation. Photo: Isabel Infantes/AFP via Getty
UK interest rates have been rising in recent months as the Bank of England battles to tame inflation. Photo: Isabel Infantes/AFP via Getty (ISABEL INFANTES via Getty Images)

British lenders have returned to the mortgage market with higher interest rates after freezing fixed-rate home loans last week following turmoil in the UK government bond market.

Lenders withdrew hundreds of mortgage products in recent days, which may leave some borrowers struggling to secure a deal.

It comes in the wake of UK chancellor Kwasi Kwarteng's mini-budget, delivered just a little over a week ago, which has seen gilt yields skyrocket.

Here's our round up of what the lenders are doing with regards to mortgage interest rates.

Read more: How a sinking pound will inflate mortgage debt for millions

What are fixed rates?

Fixed deal interest rates do not change during the term of the mortgage, meaning rates are quoted for new or renewing borrowers and stay the same during the period.

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Fixed rates have jumped in recent days, with the average two-year fixed rate now at 5.75%, up from 4.74% on 23 September – the day of the mini-budget, according to financial information service Moneyfacts.

The average two-year fixed deal was 2.34% in December.

The surge means rates on two-year fixed deals are at their highest level since December 2008, when rates were 5.80%, the figures show.

Watch: Will UK house prices ever fall?

Why are banks raising rates and which ones are?

Lenders such as Virgin Money, NatWest (NWG.L), Nationwide and Skipton Building Society have been scrambling to reprice deals after sterling's fall fuelled forecast of rates peaking at 6% by spring next year.

NatWest, the only lender that continued to offer new mortgages at previous rates last week, on Monday hiked rates across its residential and buy-to-let products.

The bank announced it increased rates by nearly 1.5 percentage points on some of its remortgage deals, fuelling fears that borrowers face steep cost hikes when their fixed-term mortgages expire.

Meanwhile, Barclays (BARC.L) told brokers late on Monday that it would lift rates across certain residential and buy-to-let deals from Tuesday.

Skipton, which last week withdrew mortgages for new customers, said it would return to the market with a new five-year fixed range at higher rates on Tuesday, including a product for those with only a 5% deposit.

Read more: UK house prices stagnate as inflation and interest rate hikes hit

The Halifax – Britain's biggest mortgage lender – announced it would launch its new, higher rates on Wednesday.

"The new rates reflect the continued increase in mortgage market pricing over recent weeks," a spokesperson for Halifax said.

On Monday, there were 2,262 mortgage products available for UK borrowers, below the 3,961 available on the morning of the mini-budget, Moneyfacts said, after lenders rushed to withdraw deals from the market.

That represents a 43% fall. Products were last withdrawn quickly in 2020 at the start of the coronavirus pandemic, but not at such a level.

According to the Bank of England (BoE), more than 2 million borrowers with fixed-term products will need to remortgage their house between now and the end of 2024.

Millions of homeowners with fixed-term products will need to remortgage their house between now and the end of 2024, according to the Bank of England. Photo: Reuters/Suzanne Plunkett
Millions of homeowners with fixed-term products will need to remortgage their house between now and the end of 2024, according to the Bank of England. Photo: Reuters/Suzanne Plunkett (Suzanne Plunkett / reuters)

Why have rates gone up?

The chaos following the partial budget 11 days ago has wreaked havoc across several markets, which has trickled into the mortgage sector.

Mortgage rates have been climbing since the BoE has started its fight to bring inflation back to its 2% target, raising rates to 2.25% last month – the seventh rate hike in a row.

Read more: How four days of market chaos has impacted UK household finances

Separate analysis from Revolution Brokers found the monthly cost of repaying a mortgage has seen the second largest annual spike, with just energy bills increasing at a greater rate.

According to the figures, a year ago, the average buyer purchasing with a standard variable rate mortgage with an 85% loan to value was paying £13,921 per year.

With interest rates climbing since December 2021, this annual cost now sits at £16,629 per year, up by 19% – the second largest increase of all household outgoings.

Watch: How does inflation affect interest rates?