Scottish Housing Market Review: Q2 2022

6. Mortgage Interest Rates

Chart 6.1 and Chart 6.2 show the effective (or average) interest rate on outstanding mortgage balances and new mortgage advances. (Source: BoE).

In March 2020, Bank Rate was cut by a total of 65 basis points to 0.1% as a result of the Covid-19 pandemic. This fed through quickly into variable rate mortgages, with the average variable rate on outstanding mortgages falling from 2.97% in February 2020 to 2.26% in May 2020, and the average interest rate on new variable rate mortgages falling from 2.06% in February 2020 to 1.48% in May 2020, although it then increased back to 1.96% in July 2021. The average fixed rate on outstanding mortgages gradually drifted down during this period, while the average fixed rate on new mortgages, despite displaying more volatility, also fell to 1.58% by December 2021.

More recently in response to the rise in inflation, the Bank of England has increased the Bank rate by 15 basis points in December, followed by 25 basis points in February, March, May and June for a cumulative rise of 115 basis points to 1.25%, returning Bank Rate to the highest level since 2009. Since the latest data on average mortgage rates is for April 2022, the data only reflects the December, February and March Bank Rate changes. The increase in the bank rate appears to be increasing average variable rates and fixed rates on new advances, with the average variable rate on outstanding mortgages increasing from 2.32% in December 2021 to 2.78% in April 2022. In addition, the average variable rate on new advances also increased after the rise in bank rate, from 1.60% to 2.05% over the same period, whilst fixed rates on new advances increased from 1.58% to 1.81%.

Effective Monthly Mortgage Interest Rates (UK)

Source: Bank of England

A 115 basis point increase in interest rates is estimated to increase the monthly payment by around £100 per month for an average new variable rate and by around £50 per month on the average outstanding variable rate mortgage in Scotland.

The spread between the average advertised rate on 2 year fixed 90% and 75% LTV mortgages increased during the pandemic from 51 basis points in April 2020 to 189 basis points in December 2020, as shown in Chart 6.3. However, since April 2021, the spread has been falling, reaching 23 basis points in May 2022, the lowest level since June 2008. (Source: BoE)

Source: Bank of England

Chart 6.4 shows that the trend for an increasing share of mortgages to be at fixed rates has continued, with 94.3% of new mortgages and 81.8% of outstanding mortgages on fixed rates as of Q1 2022. (Source: FCA)

Source: FCA