Mortgage rate increases: What it means for those taking on building projects

A chalkboard with a model house on it and chalk writing saying "mortgage rates" with an arrow pointing upward
Mortgage rate increases have hit a 15-year record high in 2023, although these could be the peak prices we see following the Bank of England's decision to keep the base rate at 5.25% (Image credit: Getty)

Mortgage rate increases have surged to their highest level in 15 years, surpassing the previous peak observed after last year's mini-budget.

Presently, the average rate for a two-year fixed rate mortgage stands at 6.62%, whilst a five-year fixed rate stands at 6.11% a level not witnessed since the financial crisis in August 2008. 

These unprecedented rate hikes will significantly impact individuals seeking mortgages for self build or renovation projects.

At the moment the Bank Rate rests at 5.25%, which has the potential to affect your project, and here we will explore the implications it may have.

Why have mortgage rates increased?

The Bank of England's (BoE) base rate influences mortgage rates so any rise could potentially prompt increases in what banks charge.

A number of banks raised their interest rates in September 1st following the initial rise of the base rate to 5.25%, such as Nationwide who's Base Mortgage Rate (BMR) increased from 6.50% to 6.75%.

Who is impacted by mortgage rate rises?

The recent base rate announcement will not affect all mortgages and mortgage options.

For those with fixed-rate mortgages, the rate rise will not affect them until their current deal expires. At that point, they would transition to their lender's standard variable rate (SVR) rate unless they opt for a new mortgage deal.

However, homeowners with tracker mortgage deals or variable rates will experience an immediate impact on their monthly payments due to the rise in mortgage rates. This is because their rates are directly linked to the base rate.

How will self build mortgages be affected?

Self build mortgages differ from traditional mortgages as they serve as a short-term financing solution, typically lasting a couple of years to cover the duration of the construction process.

These mortgages are designed to support self builders by offering stage payments at crucial milestones throughout the building project, ensuring sufficient cash flow for the construction of their homes.

Since self build mortgages have shorter terms, they often come in the form of variable deals that align with the BoE base rate, rather than fixed-rate deals.

Also, as these deals are seen as risker by banks they are often charged at higher rates than standard mortgages.

Therefore, self builders could expect to pay even higher rates which could potentially create affordability challenges for some self builders.

Women refurbishing bathroom

Those looking gain funding for their self build project or renovation may find less fluctuation in mortgage rates moving forward following the BoE's decision to keep the base rate at 5.25% (Image credit: Getty Images)

How will renovators be affected?

Those who are looking at funding options for renovating a house could find mortgage rates fluctuating less following the BoE's decision to keep the base rate at 5.25%.

Renovation mortgages, similar to conventional mortgages, will also be impacted if they are based on tracker or variable rates. In such cases, an increase in rates could result in higher monthly payments. 

Although, those with fixed-rate renovation mortgages will not experience any changes until they need to remortgage.

Typically, a renovation mortgage is necessary when financing a property that requires significant repairs, conversion, or is considered uninhabitable. It allows borrowers to secure sufficient funds for the purpose of undertaking building work.

Couple looking at plans on building site

Self build mortgages may not be as expensive as expected moving forward as predictions of a rise in the base rate were proven incorrect following the BoE's decision to keep the base rate the same on November 2nd (Image credit: Getty Images)

Will interest rates go down in the future?

Inflation has fallen for the third consecutive month, defying predictions from economists, which could lead to lowering interest rates for borrowers.

The BoE predict that by the end of the year, inflation will go down even further due to energy prices falling, a fall in imported goods, and people spending less on goods which could help reduce inflation and the base rate.

Jeremy Hunt, the Chancellor, said: “Today’s news shows the plan to deal with inflation is working – plain and simple.

“But it is still too high which is why it is all the more important to stick to our plan to halve it so we can ease the pressure on families and businesses."

Joseph Mullane
News Editor

News Editor Joseph has previously written for Today’s Media and Chambers & Partners, focusing on news for conveyancers and industry professionals.  Joseph has just started his own self build project, building his own home on his family’s farm with planning permission for a timber frame, three-bedroom house in a one-acre field. The foundation work has already begun and he hopes to have the home built in the next year. Prior to this he renovated his family's home as well as doing several DIY projects, including installing a shower, building sheds, and livestock fences and shelters for the farm’s animals. Outside of homebuilding, Joseph loves rugby and has written for Rugby World, the world’s largest rugby magazine.

With contributions from