Market sentiment will be boosted, data suggests
Waiting to hear whether a mortgage application has been approved is one of the most stressful moments in the house-moving process – aside from packing up your boxes of possessions and the big move itself.
So, the latest research from specialist lender Octane Capital will give heart to those waiting to hear whether it’s a ‘yes’ or a ‘no’ from the lender of their choice – and it will quite possibly encourage their brokers too.
Analysing data going as far back as 2008, it found that mortgage approval levels climbed by an average of 2.62% over the three months which followed an interest rate cut. Conversely, in the three months that followed an interest rate increase, mortgage approval levels fell at an average monthly rate of 1.43%.
This illustration of just how powerfully a base rate decrease can impact market sentiment bodes well for the industry, of course, following the Bank of England’s base rate reduction from 5.25% to 5.0% at the start of August.
Even a hold on the base rate can help improve market stability, it seems. Octane Capital found the number of mortgage approvals per month rose from 44,424 in September 2023, when the rate was first held at 5.25%, to over 60,000 in February of this year. It has largely remained at this level ever since.
“Now that the base rate is starting to reduce, we expect this pressure to uncoil at pace which should drive further house price growth over the remainder of the year,” noted Jonathan Samuels, CEO of Octane Capital.
What impact does a base rate cut have on consumer confidence?
Responding to the findings, Peter Brodnicki, chief executive of Mortgage Advice Bureau, said it is increasingly more difficult to pull on historic trends to predict the pace of a housing recovery - and clearly the affordability impact has not disappeared just because we have seen the first of several predicted base rate cuts.
“Having said that, I am a firm believer that you typically regain the housing transactions lost in a downturn as clearly pent-up demand builds and at some point starts to be released,” said Brodnicki (pictured left). ”Buyers able to purchase but waiting for further interest rate cuts, risk paying more for their property as prices start to edge up which they are already doing.”
He added: “So, plenty of reasons to be optimistic with more interest rate and political stability, but I expect the pace of the recovery to build steadily rather than seeing the more significant bounce experienced on previous occasions.”
Leon Diamond, CEO of LiveMore - the mortgage lender for people aged 50 to 90 plus – said the base rate cut clearly helps with consumer confidence and market stimulation.
“Couple that with lower swap rates and you have an environment where lenders can pass on their cost-savings to consumers by lowering interest rates,” Diamond (pictured centre) told Mortgage Introducer. “So, in this climate, not only will you get more applications, you’ll also get more approvals, not least because affordability can now be less of a barrier.
“We’ve heard BoE governor Andrew Bailey this week, warning that it’s too early to declare victory over inflation, so the UK economy isn’t out of the woods yet. But we’re certainly on the right path in the housing market and enjoying a bit of an Indian summer.”
The analysis by Octane Capital shows that perhaps the largest boost to market sentiment, as a result of an interest rate cut, came during COVID, with mortgage approvals increasing at an average rate of 118.4% in the three months following the April 2020 base rate cut to 0.10%.
“We definitely saw a boom during the COVID period in 2020,” confirmed broker Helen MacKenzie (pictured right), consultant at MacKenzie Mortgages. “Judging by the increase in enquiries I have seen, especially this week, I do feel very confident in the mortgage market going forward.
“Lenders seem to be trying to compete with each other with their rate offerings and still reducing them frequently. I’m interested to see how much further the reductions will be in the weeks ahead.”
Read more: Why mortgage brokers come into their own as rates fall
How is the mortgage market performing currently?
Ahmed Bawa, CEO of Rosemount Financial Solutions (IFA) shared that he, too, has seen a real upturn in mortgage activity recently.
“The fact that the Bank of England has got to grips with inflation has really helped, and that fed into the base rate cut,” said Bawa. “We now have the five-year SONIA (Sterling Overnight Index Rate) rate heading towards 3.5%, so the market is pricing in further cuts. We are looking at sub-4% rates towards the end of the next quarter, which is only going to further boost interest.”
Bawa added that the fact that house price growth has eased has meant more potential buyers are coming forward, particularly first-time buyers who are exploring their options again.
“In addition, there have been families who in the past have renovated in order to meet the needs of their growing family, but are now looking at whether it’s time to move onto a bigger home,” he said. “Things are obviously more settled on the political side, and that will impact confidence. The one caveat though is the budget - if there is an increase in taxes, that will have a knock-on effect. Similarly, if the government opts to make life harder for landlords, that will feed into activity among buyers as well.”
The research resonated with Oliver Fare, property finance broker at Fox Davidson, who acknowledged that lower interest rates makes borrowing easier and more appealing for homebuyers.
“This is particularly important now, given the recent challenges with affordability,” Fare said. “As the base rate continues to drop, the release of built-up demand could lead to increased house prices and greater market activity throughout the rest of the year.”
