Mortgage rates rose sharply during 2023, increasing costs for buyers and existing borrowers approaching the end of fixed deals.
However, four factors reduced the likelihood of a repeat of the 2008 housing crisis:
- Many homeowners held more equity.
- Some households had accumulated savings or reduced their mortgage balances.
- Mortgage affordability assessments had tested borrowers against higher payments.
- Lenders generally considered support arrangements before repossession.
These factors did not protect every household. Higher rates still reduced borrowing capacity and increased monthly payments.
The practical response depended on the mortgage balance, remaining term, income, equity and future plans.
Why were mortgage rates rising in July 2023?
UK mortgage rates rose during 2023 as lenders responded to inflation, higher funding costs and changes in Bank Rate.
On 22 June 2023, the Bank of England increased Bank Rate from 4.5% to 5%. The decision formed part of its attempt to return inflation towards its 2% target.
Borrowers could review the Bank of England’s June 2023 monetary policy decision for the economic position at that time.
By July 2023, some average two-year fixed mortgage rates were approaching 7%.
That did not mean every borrower would pay that rate. Pricing depended on the lender, deposit, equity, credit profile and mortgage type.
However, people leaving much lower fixed rates could face a substantial payment increase.
The central question was not whether higher rates mattered. They clearly did.
The more useful question was whether household finances and mortgage regulation had created greater resilience than during previous downturns.
Four factors that reduced the wider mortgage-rate shock
1. Many homeowners had more property equity
Property equity is the difference between a home’s value and the outstanding mortgage balance.
House prices increased significantly in many areas before and during the pandemic. Meanwhile, borrowers continued reducing their mortgage balances through monthly repayments.
Consequently, some homeowners entered the 2023 rate increase with lower loan-to-value ratios.
A lower loan-to-value ratio could provide several advantages:
- Access to a broader range of mortgage products
- Lower pricing than higher loan-to-value products
- More protection against moderate property-price falls
- Greater scope to restructure the mortgage
Equity did not remove the effect of higher interest rates. A large mortgage could still become difficult to support.
However, it reduced the number of households immediately exposed to negative equity.
Borrowers considering a new deal could explore the practical stages of remortgaging, including valuation, affordability and product eligibility.
2. Some households had savings or smaller mortgage balances
Pandemic restrictions reduced spending opportunities for certain households.
Some people accumulated savings. Others used surplus income to make mortgage overpayments.
These financial reserves could help borrowers:
- Cover a temporary payment increase
- Reduce the mortgage before refinancing
- Increase their deposit when moving
- Pay arrangement or valuation costs
- Avoid making a rushed decision
This protection was not universal.
Many households had little or no savings. The cost-of-living increase also reduced the value of existing reserves.
Therefore, savings should not be treated as evidence that higher mortgage payments were affordable for everyone.
The more important principle was preparation. A borrower with accurate figures could compare options before a fixed rate ended.
A mortgage calculator could provide an initial repayment estimate. It would not confirm lender approval or replace a full affordability assessment.
3. Mortgage affordability testing had created some protection
Lenders assessed whether applicants could afford their mortgages before approving them.
An affordability review usually considers:
- Basic and variable income
- Household expenditure
- Credit commitments
- Dependants
- Mortgage term
- Loan size
- Product rate
- Possible future payment increases
Not all lenders used the same formula. Their assumptions and acceptable income evidence also differed.
However, the wider purpose was consistent. A mortgage needs to remain supportable under more difficult conditions.
This testing may have prevented some borrowers from taking larger loans during the low-rate period.
That could feel restrictive when rates were low. Yet the same caution offered some protection when payments increased.
Affordability testing was not a guarantee against financial difficulty.
Circumstances could still change through illness, redundancy, separation, reduced income or higher household costs.
Prospective borrowers could use the residential mortgage affordability calculator to begin assessing their position.
For a further explanation of expenditure, income and borrowing limits, see how mortgage affordability works.
4. Repossession was generally not a lender’s first response
Higher mortgage rates raised concerns about arrears and repossessions.
During the first quarter of 2023, 750 homeowner properties and 410 buy-to-let properties were taken into possession.
Those figures had increased from the previous quarter. Therefore, they should not be dismissed.
However, possessions remained limited relative to the total number of outstanding UK mortgages.
Lenders would generally examine other steps before repossession. Depending on the circumstances, those steps could include:
- A temporary payment arrangement
- Extending the mortgage term
- Moving temporarily to interest-only payments
- Reviewing payment dates
- Capitalising arrears where appropriate
- Allowing time for an orderly property sale
Any change could affect future costs and would require lender approval.
Borrowers experiencing difficulty should contact their lender early. Missed payments could damage the credit record and reduce later refinancing options.
The existence of support did not make higher rates harmless. It meant the mortgage system contained mechanisms intended to prevent immediate escalation.
How higher mortgage rates affected affordability
A higher mortgage rate affects more than the monthly payment.
It can also reduce the amount a person is permitted to borrow.
Lenders assess the relationship between income, expenditure and future mortgage commitments. When projected payments rise, the affordable loan may fall.
First-time buyers could respond by:
- Increasing their deposit
- Buying a lower-priced property
- Choosing a longer mortgage term
- Delaying the purchase
- Reviewing different lender criteria
- Reducing other credit commitments
Existing homeowners faced different questions.
They needed to compare the cost of a new mortgage with their lender’s standard variable rate and any product-transfer options.
A lower headline rate was not automatically the cheapest option.
Arrangement fees, valuation costs, legal work, early repayment charges and incentives could change the overall cost.
Could extending the mortgage term reduce payments?
Extending the mortgage term could reduce the required monthly payment.
The mortgage balance would be repaid across more months. However, interest would usually be charged for longer.
For example, moving from a remaining term of 20 years to 30 years could improve monthly cash flow.
It could also increase the total interest paid considerably.
A longer term may affect:
- The borrower’s planned retirement age
- Future affordability
- Total borrowing cost
- The rate at which equity is built
- Eligibility under lender age limits
The decision should consider both today’s payment and tomorrow’s debt.
Affordability is not simply the smallest possible monthly figure. It is the ability to sustain the mortgage without creating an unreasonable future burden.
Could borrowers switch temporarily to interest-only payments?
An interest-only arrangement requires the borrower to pay interest without reducing the capital balance.
This can lower monthly payments temporarily. However, the original capital remains outstanding.
The lender may require evidence of:
- The reason for the request
- Current income and expenditure
- The proposed duration
- A credible repayment strategy
- The borrower’s longer-term position
Interest-only should not be treated as permanent payment relief without a plan for repaying the balance.
Some borrowers may instead consider a full interest-only mortgage where suitable and available.
Should borrowers use savings to reduce the mortgage?
A lump-sum mortgage reduction can lower the balance and future interest cost.
It may also move the mortgage into a lower loan-to-value band.
Before making an overpayment, borrowers should check:
- The lender’s annual overpayment allowance
- Any early repayment charge
- The amount of emergency savings remaining
- Other higher-cost debts
- Planned property costs
- Future income security
Using every available pound to reduce the mortgage could leave a household without accessible reserves.
The technically cheapest decision is not always the most resilient one.
What should borrowers check before a fixed rate ends?
Borrowers approaching the end of a fixed mortgage period could review:
- The exact fixed-rate expiry date
- The outstanding mortgage balance
- Any early repayment charge
- The current property value
- The remaining mortgage term
- Household income and expenditure
- Existing loans and credit cards
- Product-transfer options
- Remortgage products from other lenders
- The total cost of each option
Some mortgage offers could be secured several months before the existing deal ends.
Starting early allowed more time to gather documents, assess affordability and consider changing market conditions.
Borrowers could also review the Connect Lifetime affordability calculator when estimating how payments might fit within their household budget.
Did higher rates mean the housing market was safe?
No.
The factors described in this article reduced some risks. They did not remove them.
Higher mortgage rates could still cause:
- Payment shock
- Lower borrowing capacity
- Reduced buyer demand
- Slower property transactions
- Higher arrears
- Falling property values
- Increased pressure on landlords
- Difficult choices for households
The market’s resilience depended on how long rates remained elevated, employment conditions and household income.
It also depended on how quickly borrowers acted when their mortgage became difficult to support.
A measured view of mortgage rates in 2023
The mortgage-rate increase of 2023 placed genuine pressure on household finances.
However, the position was not identical to earlier housing downturns.
Higher equity, household reserves, affordability assessments and lender support gave parts of the market greater protection.
That protection was uneven and could not replace individual planning.
A mortgage is a long-term commitment, but its price changes over time.
The practical task is not to predict every rate decision. It is to understand the mortgage, test the household budget and act before choices become limited.
Connect Mortgages can assess mortgage products from an extensive range of lenders. Any recommendation would depend on the borrower’s circumstances, eligibility and requirements.
Frequently asked questions
Why did fixed mortgage rates rise before Bank Rate changed?
Fixed mortgage pricing was influenced by expected future interest rates and wholesale funding costs.
Lenders could therefore change product rates before an official Bank Rate decision.
Did every mortgage payment rise in 2023?
No.
Borrowers with an existing fixed-rate mortgage usually retained that rate until the fixed period ended.
Tracker and variable-rate borrowers could experience changes sooner.
Was a lower mortgage rate always the cheapest deal?
No.
Fees, incentives, early repayment charges and the fixed period could change the total cost.
Borrowers needed to compare both the rate and the full product cost.
Could a borrower keep their existing lender?
Possibly.
Existing lenders could offer product-transfer options without moving the mortgage to another provider.
Eligibility, rates and affordability checks varied.
What should a borrower do if payments become difficult?
The borrower should contact the lender as early as possible.
Early contact may provide more options than waiting until several payments have been missed.
Your home may be repossessed if you do not keep up repayments on your mortgage.
