Five-year mortgage rates hit 6%! How can we avoid a house price crash now? | Personal Finance | Finance

The average five-year fixed residential mortgage rate jumped to 6.01 percent this morning, up from 5.97 percent on Monday, according to financial data provider Moneyfacts. Two-year fixes are even more expensive at an average 6.47 percent, up from 6.42 percent yesterday.

Worryingly, this is far from the end of it.

Bank of England base rate is currently five percent but its rate-setting committee is expected to increase that by another 50 basis points at its next meeting on August 3, lifting it to 5.5 percent.

Two further rate hikes of 0.25 percent are expected in September and November. If those come through, base rate will hit six percent.

In that scenario, two-year fixed rate mortgages could hurtle towards 7.5 percent, piling yet more pressure on homeowners.

A couple of years ago, savers were able to borrow for two percent or less, so this is a dramatic change.

Now here’s the really worrying part.

Although house prices fell by 3.5 percent in the year to June, according to Nationwide, the full impact of base rate hikes has yet to make itself felt.

Most borrowers are still protected by their existing fixed-rate mortgages. So far, less than a million homeowners have had to remortgage but that is changing fast.

A million homeowners will see their fixed deals expire in the second half of this year. They face paying an extra £442 a month, or £5,304 a year, Oxford Economic calculates.

Another 1.5 million mortgages will expire next year, creating a rolling crisis as steadily more borrowers face higher rates.

The higher mortgage rates rise, the worse it will be.

So how bad will it get?

When it comes to house price crash forecasts, you can take your pick. The Office for Budget Responsibility reckons prices will fall by a modest nine percent, before starting to rise again in 2024. 

More alarmist headlines predict crashes of up to 25 percent or 35 percent, although I reckon they’ll prove wide of the mark.

While borrowers are under intense pressure, a third of all homeowners have cleared their debt and have nothing to fear.

Most will be older people who bought their home decades ago and have enjoyed years of stellar price growth since.

Recent buyers in their 30s and 40s are most vulnerable, as many will have stretched themselves to the max to get on the ladder.

As the cost-of-living crisis rages, they will struggle to pay higher mortgage costs on top of sky-high food and energy bills.

One piece of good news is that the government is leaning on lenders to go easy on troubled borrowers, which could prevent a rash of repossessions.

They will be given options such as extending their mortgage term or paying only the interest on their mortgage for a while, easing the burden. 

Better still, unemployment is low at just 3.4 percent. While there are jobs out there, many homeowners should be able to muddle through.

I’m not downplaying the challenges though.

Disillusioned buy-to-let landlords may offload their properties as higher borrowing costs eat into their rental income, flooding the market with cheap stock.

READ MORE: Every man for himself as housing market hits rocks – only advice is caution

The big question is what happens to inflation – and therefore interest and mortgage rates.

Until recently the BoE was forecasting that consumer price growth would fall to 5.1 percent by the end of the year, and keep sliding in 2024.

In that relatively rosy scenario, the property market could avoid a full-blown crash. Inflation is steadily falling across the US and Europe, yet it’s proving much more stubborn in the UK.

A growing number of analysts warn there will be no quick return to the era of near-zero interest rates, and we’ll have to get used to today’s higher mortgage rates.

Worried borrowers should overpay their mortgage if they can to reduce the burden. Most deals now allow overpayments of up to 10 percent a year, but check the small print first.

You usually can’t borrow back a mortgage overpayment if you need cash in a hurry, so leave some cash on easy access for emergencies.

I expect house prices to fall in the second half of the year, month after month. Yet the decline may be slower than the hardcore doom-mongers are warning today. 

Let’s hope so. The alternative doesn’t bear thinking about.