How high will interest rates go and what does it mean for your mortgage?

Soaring inflation, a plunging pound and expectations for enormous interest rate rises have thrown the mortgage market into turmoil.

Lenders have pulled deals en masse and rates are rising rapidly. Here is everything you need to know if you are a would-be buyer or a homeowner.

How much will interest rates rise by and when will they come down?

Markets have priced in a peak in the Bank Rate of 5.8pc in July 2023, up from 2.25pc today.

But Andrew Wishart, of Capital Economics, an analyst, cautioned that this expectation should not be taken too literally. However, big rate rises are undoubtedly in the pipeline.

Previously, Capital Economics had forecast a Bank Rate peak at 4pc. “We now think there is a good chance that the Bank rate will rise from 2.25pc to a peak of 5pc next year, rather than 4pc,” Mr Wishart said.

Pantheon Macroeconomics, another analyst, has forecast a lower peak in the Bank Rate at 4pc, and expects this will fall to 3.5pc in 2024.

Can I still get a mortgage and what are my best options?

The number of available mortgage deals has plunged. Altogether, lenders yesterday pulled 284 deals from the market, according to Moneyfacts, an analyst.

As of this morning, there were 3,596 residential mortgage deals on the market – a loss of nearly 10pc in just four days.

Overall, the number was down 32pc compared to the start of December, before interest rate rises began.

And the numbers will keep falling because more lenders are pulling deals. This morning, specialist lenders LiveMore Capital temporarily suspended its fixed-rate deals, while Hodge, another later-life lender, withdrew its residential and holiday let deals in the short term. Buy-to-let lender CHL also withdrew its mortgage range.

Lenders are expected to relaunch deals soon, but these will be at higher rates than before.

Borrowers still have options, but there is no guarantee how long these deals will be available. They are likely to become more expensive soon.

Right now, the best two-year fixed-rate deal on the market for a buyer with a 10pc deposit is with Penrith Building Society at 3.49pc with a £999 fee, according to Moneyfacts. Buyers with a 25pc deposit can get a two-year fix at 4.06pc with a £490 fee with First Direct.

Aaron Strutt, of Trinity Financial mortgage brokers, said: “There is a frenzy of people wanting to get a cheap enough mortgage while they still can, because the rates will go up.” With deals being withdrawn with a few hours’ notice, borrowers and brokers have rushed to lock in a fixed rate while they can. But the turmoil has caused banks’ phone lines and applications systems to jam.

What will interest rate rises mean for my mortgage payments?

Borrowers can expect big rate rises at each of the Bank of England’s Monetary Policy Committee meetings, which are held every six weeks. There was speculation yesterday that the Bank of England would make an emergency rate rise, but Governor Andrew Bailey said that the Bank would make its decision at its next meeting on November 3.

The MPC’s decisions will affect mortgage payments in three different ways. First, the 1.6 million borrowers who are on variable rate deals – one in five mortgaged homeowners – will see their bills rise almost immediately.

If it raises the Bank Rate by 0.75 percentage points in November, an average homeowner on a variable rate would see their monthly payments jump by £95, according to Hamptons estate agents. This would be followed by further rises following each Bank Rate decision.

The second way buyers and homemovers would be hit is when the Bank Rate change filters into rate rises for new mortgages. The average rate for a two-year fixed-rate mortgage with a 25pc deposit has already tripled so far this year, rising from 1.34pc in January to 3.64pc, according to Pantheon. “It will rise to at least 6pc by the end of the year, if markets are right about the path for the Bank rate, and possibly further,” Pantheon said.

If the rate on a two-year fix hits 6.14pc, monthly payments for a buyer purchasing an average UK property will be £1,488, according to Hamptons. This would be £321 per month more than in August.

If the Bank Rate rose to 6pc next year, and mortgage rates rose to 7.89pc, the monthly payment on an average home would hit £1,696. That is £569 per month more than in August.

This means the buyer would pay an extra £13,656 in interest over the course of a two-year fix.

There is a bigger, looming problem for homeowners who are coming to the end of their fixed-rate deals. Pantheon expects the average homeowner remortgaging this winter will see a four percentage point jump in their mortgage rate.

Next year, the blow will be even greater. According to UK Finance, the lender body, 1.8 million homeowners will need to refinance in 2023. Half a million will be coming to the end of two-year fixes, meaning they took out loans when it was possible to get sub-1pc mortgage deals. They will have to refinance at rates that are possibly eight times higher.

How much will I be able to borrow?

A large chunk of homeowners hoping to remortgage next year will be unable to because they will now fail lenders’ affordability stress tests.

This means they will not be able to access the best rates, and many will be pushed onto product transfer rates, which are typically one percentage point higher than the market rate.

“Probably more people than ever will stay with their existing lender and take product transfer rates,” Mr Strutt said.

New buyers will find that the maximum amount they can borrow will plunge. This is because expectations of soaring rates will reduce the size of mortgages that banks are able to lend, based on requirements for affordability stress testing.

Mr Wishart said an expectation that the Bank Rate would rise to 6pc would cause the maximum income multiple offered by banks to plunge from 4.7 in August to 3.7 within months.

This would mean a joint-income household with a combined salary of £90,000 would see the amount they can borrow fall from £423,000 to £333,000 – a drop of £90,000, or 21pc.

How can I protect myself from soaring rates?

There are two key ways that homeowners can protect themselves from rising mortgage costs.

First, they can try to fix their rates. Many lenders offer a mortgage that can be held for six months, and some even nine months, meaning borrowers can lock in an interest rate half a year before they need the loan.

Because banks expect the Bank Rate to fall after its peak in 2023, the rates on some long-term fixed-rate deals look competitively priced in the current market.

Barclays, for example, offers a seven-year fixed-rate deal at 3.49pc with a £990 fee, for buyers with a 40pc deposit. However, this means that borrowers could miss out on cheap rates as and when rates eventually fall.

Homeowners can also reduce their bill by paying off part of their mortgage early – although this is only an option to those who have cash to spare.

Borrowers can sometimes access significantly better rates, however, even if they make small increases in their equity. In July, for example, a buyer or homeowner with 10pc equity could access a rate that was 0.3 percentage points cheaper than for a buyer with only 5pc, according to Pantheon.

Click here for more information on what you can do to cut your costs.