The latest inflation figures have spooked the financial markets, causing mortgage lenders to withdraw many of their deals for repricing.
Banks and building societies have pulled nearly 400 deals from the market in the past month, with some temporarily withdrawing their entire ranges.
We take a look at what’s happening in the mortgage market and what you should do if you need to remortgage.
Why are lenders withdrawing deals?
There are two different types of mortgage, fixed rate ones and variable rate ones.
The cost at which lenders borrow money for variable rate products is based on the Bank of England Bank Rate. When this goes up, so does the cost of variable rate mortgages, such as tracker deals.
Lenders’ borrowing costs for fixed rate mortgages are more complicated. These deals are based on so-called Swap rates – which is the rate at which lenders borrow money for a set period of time, such as two years or five years.
The cost of Swap rates are based on a number of different factors, including government borrowing costs and predictions on what the Bank Rate will be in future.
Swap rates shot up in the wake of the mini-Budget in September because government borrowing costs increased after financial markets lost confidence in the government’s plans for the economy.
This time around, Swap rates are increasing because inflation remains stubbornly high.
The Bank of England’s Monetary Policy Committee (MPC) has increased interest rates from a record low of 0.1% to 5% in a bid to lower inflation, but so far, these rate rises have had little impact.
The latest inflation figures, which showed that overall inflation was falling slower than expected and core inflation was actually increasing, has spooked markets.
Economists had previously predicted the Bank Rate would peak at 4.5%, but with inflation still remaining high, they now expect it to rise to 5.25% or 5.5%, with some predicting it could go as high as 6%.
These expectations have sent Swap rates higher, meaning lenders are withdrawing their fixed rate mortgage deals so that they can reprice them to reflect their own higher borrowing costs.
If you're looking to secure a new mortgage, the best thing you can do right now is to speak with a mortgage broker, who can help you to find the best deals out there.
What mortgage deals are being pulled in June 2023?
The number of different mortgage deals available has fallen by 387 products since the middle of May.
The majority of mortgages that have been withdrawn are fixed rate products, due to the recent increases in Swap rates.
In fact, the number of variable rate mortgages available has actually increased for some deposit bands.
Deals have been withdrawn across all deposit ranges, although products for people with smaller deposits have been less affected.
Lenders offer their most competitive deals to people with large deposits or equity stakes in their property and it is this part of the market that has borne the brunt of the withdrawals for repricing.
Around 100 fixed rate mortgages have been taken off the market in the past month for people with 40% to put down – the equivalent of 17% of all deals in this space.
A similar number of products have been withdrawn for both those looking to borrow 75% of their home’s value and those looking to borrow 80%.
Product withdrawals have been made by all types of lender, from large high street banks to smaller, regional building societies, as they all review the cost of their deals.
What mortgage deals are still available?
While headlines stating that mortgage choice has shrunk and some lenders have pulled their entire ranges may appear alarming, it is important to keep the situation in context.
There are still a total of nearly 5,000 different mortgage products available.
Unlike during the global financial crisis and the early stage of the Covid-19 pandemic, when lenders pulled products for people with only small deposits, mortgages remain available at all deposit levels – there is just a little less choice than previously.
The current round of withdrawals has been caused by lenders facing higher borrowing costs, so it is quite different to the liquidity issues seen during the global financial crisis and their reduced appetite for risk at the start of the pandemic.
As a result, lenders who have withdrawn their products are expected to return to the market, just charging slightly higher interest rates.
Are fixed rate deals still available?
While fixed rate deals have borne the brunt of the withdrawals, they are still very much available.
In fact, around two-thirds of all mortgages currently on the market are fixed rate ones.
The number of fixed rate mortgages on offer is expected to increase in the coming days as lenders who withdrew their products for repricing, relaunch them.
Can you still get a mortgage with a small deposit?
Mortgages for people with small deposits have been less impacted than other areas of the market.
There are currently 612 different products to choose from for people with only a 10% deposit, down from 682 a month earlier, and 218 for those with only 5%, compared with 242 in mid-May.
To put this into context, in the early stages of the pandemic, there were just 16 mortgages available for people with a 5% deposit and 75 for those with 10% to put down.
Although the latest data from the Bank of England signals that lenders are becoming more cautious, they seem to be cutting back on lending to people borrowing high multiples of their income, rather than those with smaller deposits.
It is also worth noting that the number of small deposit mortgages available has actually risen since the first week of June.
How much are mortgage rates rising by?
The average cost of a two-year fixed rate mortgage across all deposit levels is currently 6.01%, up from 5.3% at the beginning of May – an increase of 0.71%.
Five-year fixed rate mortgages have increased by broadly the same amount, rising to 5.67% from 4.97%.
The steepest increases have been seen for those borrowing 75% of their home’s value, with average two-year mortgage rates in this sector of the market rising by 0.89%.
But it is important to remember that these rates are averages and there are more competitive deals available if you shop around.
For example, there are still a number of two and five-year fixed rate products available with interest of around 4.5% or less.
Are mortgage rates likely to come down again soon?
The market is in a state of turmoil at the moment, and it is difficult to know how long this will last.
It is worth noting that when mortgage rates last shot up in the wake of the mini-Budget, it took a couple of months for the market to stabilise and rates to start falling again.
If the next set of inflation figures are more positive, markets may decide interest rates do not need to increase by as much as they previously thought, and mortgage rates could start to come down.
Even if the MPC does continue to increase the Bank Rate to combat inflation, most economists currently expect it to start cutting it again in 2024.
Can a lender withdraw an offer?
If you accepted a mortgage offer from a lender before the current turmoil started, you may be concerned they will now withdraw it.
While in theory lenders can withdraw mortgage offers, in practice this only tends to happen if the borrower’s circumstances change, or they cannot complete on the mortgage before the offer period expires, or issues with their property are uncovered.
Lenders tend not to withdraw fixed rate mortgage offers due to increased financing costs, as the offer is typically based on funding they already have in place.
What should I do if I need to remortgage?
If you need to remortgage in the near future, the current turmoil in the mortgage market is likely to be particularly stressful.
With things changing very quickly, it is probably worth considering using a mortgage broker to help you navigate the market.
While five-year fixed rate mortgages currently have lower interest rates than two-year ones, it might still be worth opting for the latter.
Mortgage rates are currently elevated and interest rates are expected to start falling next year.
If you take out a five-year deal, you will be locking into these rates for a five-year period, whereas if you opt for a two year one, you will have the opportunity to remortgage in two years’ time, by which point rates are expected to have fallen again.
But with the average standard variable rate – the rate you are automatically moved to once your current mortgage deal expires – currently charging more than 7%, you should think about lining up your next mortgage before your existing one ends.