The outlook for UK house buyers is about to get tougher after the average cost of two-year fixed mortgages crept back above 6% this week, according to data group Moneyfacts.

It is the highest level since last December in the wake of the disastrous mini-Budget last autumn when two-year fixed rates reached 6.65%.

It is not just buyers who are suffering. The Resolution Foundation, a think tank, estimates around three-fifths of the increase seen in annual mortgage payments has yet to be felt by households as they remain on older, lower-cost deals.

Around 7.5 million households are expected to see an increase in annual mortgage costs by 2026 according to the think tank. Ultimately, it predicts annual interest payments could tot up to £15.8 billion more than before the Bank of England started raising interest rates in December 2021.

Lenders have been busily increasing the cost of mortgages in recent weeks to reflect rising interest rate expectations. Two-year gilt yields are up more than 60% since March, rising from around 3.1% to 5% as investors price in the likelihood of further rate hikes from the Bank of England.

Upside surprises to services inflation and private sector wage growth heap more pressure on the Bank of England to continue hiking rates when it meets this week (22 June).

Economists at forecasting group EY ITEM Club believe the Bank will hike rates by another quarter of a percentage point to 4.75% but suggest expectations of rates peaking at close to 6% is
too pessimistic.

Chief economic advisor Martin Beck said: ‘Recent surveys from the Bank of England and Citi/YouGov show inflation expectations among the public continuing to decline. The Bank of England’s own Decision Maker Panel survey of businesses also suggested pay and price expectations have eased in recent months.’

The lagged effect of past rate hikes and damage inflicted by food inflation running close to 20% is already impacting consumer confidence.

On 16 June, builders’ merchant Travis Perkins (TPK) issued a profit warning after blaming higher interest rates and sticky inflation on flagging consumer confidence.

Meanwhile, the Rightmove house price index showed its first fall in June since 2018 after the average UK asking price nudged down to £372,812. While buyer demand held up during the month and was 6% higher than June 2019 before the pandemic, the number of agreed sales dipped and remained 6% below 2019 levels.

Credit ratings group Moody’s believes UK house prices could fall 10% over the next two years while a bigger drop would likely trigger a lengthy recession.

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