First-time buyers hit as mortgage rates keep rising

Mortgage rate rises are continuing "thick and fast" with borrowers told to prepare for more volatility in the coming days and weeks.

US President Donald Trump's comments on "constructive" talks with Iran brought only temporary calm to the markets.

Mortgage brokers said major lenders were still increasing rates or pulling deals, with borrowers left wondering whether they were getting a good deal or with little time to make a decision.

Low-deposit deals favoured by first-time buyers were being hit, with more deals withdrawn in a single day than at any time since the mini-Budget of 2022.

"There appears to be no rest in sight for more upheaval to the mortgage market," said Rachel Springall, from financial information service Moneyfacts.

"It will be essential for borrowers to seek independent advice to keep on top of the mortgage mayhem."

She said that the harsh reality for first-time buyers was an average interest rate of more than 6% on two-year mortgages when borrowers can only offer a 5% deposit.

That would make such a deal about £1,200 per year more expensive now that the equivalent deal at the start of March, assuming £250,000 was borrowed over 25 years.

More than 200 such deals have disappeared from the market since 6 March. Saturday saw the biggest daily withdrawal since the mini-Budget, of 52. Another 30 had been pulled on early on Tuesday.

For borrowers, the interest rate on a fixed mortgage does not change until the deal expires, usually after two or five years, and a new one is chosen to replace it.

Before the US-Israel war with Iran began, financial markets had expected UK interest rates to be cut this year. In turn, that was reducing lenders' funding costs and rates on new fixed mortgages were going down.

The war has upended all of that.

Now, the average rate on a two-year fixed deal stands at its highest since February last year at 5.51%, up from 4.83% at the start of March, according to Moneyfacts.

The average rate on a five-year fixed has risen from 4.95% at the start of March to 5.52% today - the highest since July 2024.

More than a fifth of mortgage products available at the start of the month have been withdrawn.

Aaron Strutt, of broker Trinity Financial, said lenders had found it almost impossible to price their mortgages and offer new and existing customers fixed rate deals. Rate increases were coming "thick and fast", he said.

"It is becoming increasingly difficult for borrowers to work out if they are getting a decent fixed rate and how long they will have to apply for a deal," he said.

"I suspect the cheapest rates have a shelf life of three or four days at the moment."

David Hollingworth, from broker L&C, said borrowers needed to expect "a turbulent period" for mortgage rates until things in the Middle East became clearer.

"Let's hope the talk of an easing in the conflict takes shape which should help the market find a level as it tries to predict what this may mean for the longer term interest rate outlook," he said.

The turbulence in the markets has centred on an expectation of multiple base rate rises by the Bank of England this year.

However, many economists are much more sceptical about the potential for the Bank to raise the benchmark rate.

The Bank's governor, Andrew Bailey, told the BBC last week that rate-setters would "assess how events unfold". The Monetary Policy Committee had just held rates at 3.75%.

He suggested markets were "getting ahead" of themselves in assuming several rises this year.

The stark divergence between economists and the markets is unusual and shows how uncertain the geopolitical and economic situation is proving to be.

While new mortgage costs are rising, the situation is better for people approaching retirement and looking to buy an annuity.

Annuities are bought only once, to convert a pension pot into guaranteed income for life. They became less popular with the emergence of drawdown pensions - which allows pensioners to withdraw as much money as they like at any one time while the rest remains invested in a pension.

But annuity rates are priced in relation to bond yields which have been rising since the start of the war.

Financial adviser William Burrows, of the Annuity Project, said there was a time lag, so annuity rates were likely to continue rising.