Mr Kwarteng’s mini-Budget last month spooked markets and forced banks to raise interest rates, leading to increased costs for mortgage borrowers. He has since abandoned his plan to cut the top rate of tax.
On Monday high street lenders Santander and NatWest pulled more fixed-rate deals and increased remaining rates by up to 1.5 percentage points and 1.66 percentage points respectively. Hundreds more loans were withdrawn from sale or repriced last week.
Last week markets forecast the Bank Rate to surpass 6pc next year, after concerns about the increased government borrowing required to fund the tax cuts. Markets now expect the Bank Rate to peak between 5.25% and 5.5% in 2023.
Predictions for 2022 have also cooled. The Bank of England is now expected to increase interest rates by 1 percentage point at its next meeting in November, compared with a 2 percentage point jump forecast in the immediate aftermath of the mini-Budget.
However, Jamie Lennox, of Dimora Mortgages, a broker, said it was unlikely lenders would reduce interest rates in light of slightly calmer market predictions.
Mr Lennox said: “There is a real risk that lenders are going to be swamped with applications due to the negative economic forecasts, which could see them increasing rates to curb the demand they are receiving and manage service levels.”
The Bank Rate is currently 2.25% and if these rises are passed on to mortgage borrowers, they will add thousands of pounds in interest to annual repayments.
Mr Lennox said: “Even if rates don’t go up as fast as first forecast, many homeowners are in for a rocky road as they will be coming off record low deals and many will not have priced rises into their budgets. Tough times lie ahead.”
Average mortgage rates are now close to 6pc. The average two-year fixed deal is priced at 5.75%, compared with 4.74% on the day of the mini-Budget, according to analyst Moneyfacts.
Michael Brown, of payments firm Caxton FX, said the “damage had already been done” for mortgage borrowers.
Mr Brown said: “While the top rate tax U-turn is politically important, it doesn’t really make a dent in the mini-Budget as a whole – it reverses roughly £2bn of the £45bn worth of tax cuts announced by the Chancellor.
“That’s still an additional £33bn worth of borrowing that we didn’t have 10 days ago, and gilt yields and interest rates will keep rising as a result. They may not go up at the same pace as predicted last week, but mortgage borrowers are not out of the woods and should not be breathing a sigh of relief.”
Andrew Sentance, an adviser at Cambridge Econometrics and former Bank of England rate-setter, said he expected Bank Rate to hit 3% or 3.25% next month.
Adapted from an article in the Daily Telegraph by Rachel Mortimer