With interest rates predicted to rise next month, borrowing is already becoming more expensive for budding homeowners

The average cost of a two-year fixed rate mortgage has jumped to a near two-year high as lenders brace themselves for interest rate rises.

The typical cost of one of the deals has reached 2.5% for the first time since July 2016, according to financial information group Moneyfacts.

The interest charged on five-year fixed rate home loans is also rising, although at 2.91%, it has increased by only 0.01% in the past month and remains below the level seen in July 2016, when it stood at 3.13%

Charlotte Nelson, finance expert at Moneyfacts, said: “The mortgage market is experiencing a period of upheaval, with rates that were once at all-time lows now starting to rise.”

Why is this happening?

The Bank of England’s Monetary Policy Committee has for some time been widely expected to raise the Bank Rate by a further 0.25% at its May meeting.

This expectation has caused SWAP rates, upon which fixed rate mortgages are based, to increase.

As a result, lenders face higher borrowing costs themselves, which they are passing on to customers.

But the situation is now slightly less clear cut than previously, following an interview in which Bank of England Governor Mark Carney suggested mixed economic data, including falling inflation, may cause the MPC to keep rates on hold.

It remains to be seen if his words cause a fall in SWAP rates, and, if so, whether lenders will pass this on to borrowers.

Read more: Should I use a broker when applying for a mortgage?

Who does it affect?

The rising cost of two-year fixed rate mortgages is bad news for people coming to the end of a deal or looking to switch from their lender’s standard variable rate.

Two-year fixed rate loans are typically the most popular mortgage product taken out.

But for those who are happy to be locked into a deal for longer, the cost of five-year fixed mortgages has not risen so steeply, as lenders are continuing to compete for customers in this area.

Nelson, of Moneyfacts, said tracker deals were currently less good value than fixed rate mortgages, as, in many cases, the interest rate charged on them was already higher than on fixed rate loans. Borrowers on variable rates will also have any increased in the base rate passed on to them.

But she pointed out that these deals were still worth considering for people borrowing 95% of their home’s value, as they enabled penalty-free overpayments to help build up more equity in their home and provide more choice on products when they came to remortgage.

What’s the background?

Despite the increases in mortgage rates, there are still good deals out there, particularly for those with large deposits.

The lowest two-year fixed rate loan is currently offered by Chelsea Building Society at 1.29%, although it has a maximum loan to value ratio of 65% and comes with a £1,695 product fee.

Yorkshire Building Society, Halifax and Monmouthshire Building Society also all have two-year fixed rates at below 1.35%.

Halifax currently has the lowest rate for people wanting to take out a five-year fixed rate loan at 1.72% for first-time buyers and 1.79% for second-time buyers. Both deals require a 40% deposit and have fees of £1,790.

Skipton Building Society, HSBC and Lloyds Bank all also offer sub-1.85% deals.

Searching for a better mortgage deal? Compare what's on the market with our partners, Money.

Top 3 Takeaways

  • The average cost of a two-year fixed rate mortgage has jumped to a near two-year high
  • The typical cost of a two-year fixed rate deal has reached 2.5% for the first time since July 2016
  • The interest charged on five-year fixed rate home loans is also rising, but at a slower rate

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