Mortgage rates at 6%: what it means for your budget and your mortgage offer

On 5 October the average five-year fixed mortgage rate reached 6%, according to Moneyfacts, the highest for around three years. The average two-year fix was close behind at 5.98%. At the start of September there were almost 1,500 fixed deals priced below 5%. A month later there were nine.

The Bank of England has not raised Bank Rate, which it held at 3.75% in September. Lenders price fixed deals on what the markets expect rates to do over the next few years, and those expectations have moved up quickly. We covered the background in our market monitor note, Bank Rate held, but fixed mortgage rates are climbing.

For anyone part-way through a move, the headline matters less than three quieter effects: on your budget, on the value of a mortgage offer you already hold, and on everyone else in your chain.

What 6% does to a £500,000 purchase

Take a £500,000 purchase with a £50,000 deposit and a £450,000 repayment mortgage over 25 years.

• At 4.5%, a rate that was easy to find in the summer, the monthly payment is about £2,501.
• At 6%, it is about £2,899.

That is roughly £400 a month more, or about £4,800 a year, and close to £24,000 over a five-year fix.

The other way to see it is more uncomfortable. If £2,501 a month was the most you were prepared to pay, at 6% it repays a mortgage of only about £388,000. That is around £62,000 less buying power from the same monthly payment, before a lender has applied any affordability test of its own.

These figures are illustrative. Your lender’s own rate, fees, term and affordability rules decide what you can actually borrow, and that is a question for a mortgage adviser.

Your mortgage in principle may no longer hold

A mortgage in principle, or agreement in principle, is the figure many buyers set their search by. It is an indication, not a promise, and it does not fix a rate. One issued when sub-5% deals were plentiful was based on a very different market.

That matters at two moments. Before you offer, because the home you can comfortably afford may have changed without anyone telling you. And after your offer is accepted, because the full mortgage application is assessed at today’s rates, not the rates your plans were built on. The total cost of the move matters too: our cost of buying calculator puts the stamp duty, fees and other costs in one place.

A mortgage offer is worth more than it was

If you already have a formal mortgage offer, its rate is usually fixed for as long as the offer is valid, often around six months, depending on the lender. In a market where rates have jumped, that offer may be noticeably cheaper than anything available today.

The catch is the expiry date. If the purchase is delayed beyond it, by slow searches, a problem with the survey, a down-valuation, a retention or a chain that will not move, you may have to re-apply at current rates. Some lenders will extend an offer; none is obliged to. A delay that would have been an inconvenience in the spring can now cost hundreds of pounds a month.

So the timetable carries real money now. Which parts of a transaction can genuinely be speeded up, and which only look as if they can, is something experience judges far better than optimism.

The risk hiding in the chain

Your own offer is only one of several. Every buyer below you in the chain has a mortgage offer with its own rate and its own expiry date, and some were arranged months ago at rates that no longer exist.

If one of those offers runs out before completion, that buyer may face a more expensive mortgage or a smaller one. Either can stop their purchase, and with it everyone else’s. In Jon’s experience, this is the risk that catches people out when rates rise quickly, because it sits quietly in the chain until it surfaces late, and few people think to ask about it.

If you are selling, the same applies to your buyer. The strength of an offer is not just the price; it is whether the finance behind it still works at today’s rates, and how long it has left to run. A buyer whose budget has tightened is also more likely to look for a reason to renegotiate late, often after the survey; we explain how that works in renegotiating the price after a survey.

Should you wait for rates to fall?

Nobody knows where rates will be next year, and anyone who says otherwise is guessing. Waiting can make sense if your move is genuinely optional. But prices, your own circumstances and the home you want can all change while you wait, and the next Bank of England decision, on 5 November, may not settle much either way.

A better question is whether the move works at today’s rates, with some room to spare if something goes wrong. If it does, rates are a cost to plan for, not a reason to stop. If it only works on the old rates, it is better to know that now than at the point of exchange.

Where an independent view helps

Jon has spent more than 35 years in estate agency, through markets where rates rose sharply and chains came under strain. A consultation is a chance to look at your budget, your offer and your chain with someone who has no stake in the transaction going ahead, and to decide calmly whether to press on, renegotiate or wait.