Borrowing / Mortgages

35 years since the first fixed rate mortgage – here’s what’s happened since

When the Halifax Building Society, as it was then, launched the first UK fixed rate mortgage in November 1988 the interest rate charged was 12.75% and the average UK property price stood at £55,448*

Fast forward 35 years and the average rate for a 2-year fix (75% LTV) according to the Bank of England is 5.63%, while the average property price is more than five times 1988 levels at £291,044*

So how has the mortgage and property landscape changed in the intervening period?

Affordability

In November 1988 the monthly mortgage repayment for someone borrowing 75% of the average house price was £461 and accounted for 44% of the average gross salary.

Even though house prices have increased year on year, historically low fixed mortgage rates kept the percentage of mortgage costs against salary below the 30% mark through the whole decade between 2010 and 2020

However, today a 75% LTV mortgage on the average UK house price accounts for a record 51.3% of the average gross salary thanks to soaring mortgage rates in 2022 and 23.

This sudden spike in interest rates (with 75% LTV 2 Year fixed rate peaking at 6.25% 31 July 2023) has seen the annual mortgage cost as a percentage of gross salary rocket from 30.9% in November 2021 to 51.3% 12 months later.

Extending the mortgage term becoming the norm

According to UK Finance, throughout 2022, the combination of higher house prices, soaring inflation, and rising interest rates all squeezed mortgage affordability.

The industry body reported a sharp increase in the proportion of mortgage customers borrowing over a longer term. By the end of 2022, well over half of FTBs and one third of home movers were borrowing over terms in excess of 30 years

This is fine if it’s just a temporary means of affording the monthly payments for a short term before remortgaging, but if you see the 30 plus year term through to the end, the additional costs are quite eye watering, as follows:

If someone were to take out a £218,355 mortgage at the current average rate of 5.63% it would cost £407,459 over 25 years but £500,474 over a 35-year term – an extra £93,015 – even on a more conservative mortgage rate of 4% the difference would be £60,221.

Monthly repayments

Back in 1988 the monthly repayment on the average 75% LTV mortgage of £41,586 amounted to £461 per month at a rate of 12.75%.

If the average rate was still 12.75% today, the monthly repayment on the current average 75% LTV mortgage (25-year term) of £218,355 would be £2,421 per month – but with the average rate currently at 5.63% for a 2-year fixed rate, monthly repayments are approx. £1358.

So, since 1988 the average property price has increased more than fivefold (x 5.2) but current interest rates mean monthly average mortgage repayments are fractionally below three times higher (x 2.95).

Over the last three and a half decades, fixed rate mortgages have revolutionised the residential borrowing market and have been fundamental to many consumers who sought the financial certainty and stability that this breed of mortgage product provides.

However, the recent unprecedented sharp rate increases are now resulting in extreme payment shock scenarios when people come to renew their fixed rate.

Mortgage timebomb to hit a further 1.6m borrowers in 2024

The impact of soaring mortgage rates saw the FCA launch its mortgage charter at the end of June 2023, enabling lenders to offer interest only or extended term options to borrowers for up to 6 months, without any affordability checks.

With a further 1.6 million fixed rate deals ending in 2024, it means that more than 4.4 million borrowers will have suffered a rate shock scenario since the series of base rate hikes commenced in December 2021.

It seems inevitable that with mortgage rates still relatively high, that a further period of support will be required by many borrowers, beyond the initial 6-month respite period offered by lenders via the FCA scheme.

Alastair Douglas, CEO of TotallyMoney, the credit experts, comments:

“For 13 years, the Bank of England kept the base rate locked below 1%, and the thought of it suddenly ramping up to 5.25% was almost unimaginable. People became used to cheap money — and rock bottom rates helped drive up property prices.

“Two years ago, the average two-year fixed rate deal was just shy of 2%, and anybody now rolling off an old deal is likely to be in for a shock when their mortgage payments suddenly skyrocket. Now the average two-year fixed-rate is more than 5.50% and standard variable rates are as high as 9.49%.

“And while rates were higher and wages lower, 35 years ago, homes were much cheaper. Mortgage costs now make up a considerably larger percentage of somebody’s earnings, and two years of rampant inflation will have further compounded their struggles to keep up.

“When applying for any credit product — and especially when it’s for such a large amount — it’s essential to really do your research and to consider a range of options. An independent broker could help, but also bear in mind that both your circumstances and the world around you can change at any moment.”

The end of the 2 Year fix obsession?

It’s interesting when you look at 2-year fixed mortgage rates and what subsequently happened to rates two years later when the initial deal was up for renewal.

In 18 out of 27 years since 1995, the average renewal rate 2 years later turned out to be lower and, in those instances, where the borrower faced an increase, it was relatively small, but this has all changed dramatically in the last couple of years as the following examples show:

In November 2020 the average 2-year fixed rate (75% LTV) was 1.92% but come November 2022 it was 5.98% – up by 4.06%

Similarly in November 2021 the average 2-year fixed rate (75% LTV) was 1.53% but come October 2023 (latest figs available) it is 5.63% – up by 4.10%

The move to longer term fixes

In the year to November 2016, 90% of mortgages were fixed rate with 57% for a 2-year term and 23% for 5 years.

Compare that with 2022 when 97% of mortgages were fixed rate with just 28% for 2 years and 60% for 5 years.

It’s a far cry from 1996 when only 1 in 5 mortgages (19%) were fixed rate and in 2010 when it was 1 in 2 (50%) but in the last 4 years at least 9 out of 10 new mortgages have been on a fixed rate.

The mortgage market is unrecognisable from that thirty-five years ago, it is far more competitive and dynamic.

New names have come and gone in recent years – with the likes of Sainsbury’s Bank (portfolio sold to Co-op Bank), Tesco Bank (portfolio sold to Lloyds Banking Group), and M&S Bank (taken over by HSBC) failing to make mortgage lending work.

Who knows where we’ll be in terms of lenders, rates, house prices and affordability in another three decades plus.

 ENDS

*Source: HM land registry data

Note – the ONS average earnings figure has been used as a yardstick in my calculations to show the fluctuating impact of changing house prices, interest rates and mortgage costs – I fully appreciate that many cases households will have more than one income and that others will earn higher or lower salaries.

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