Fixed rate pricing is influenced by swap rates
The Bank of England upped the base rate to 4% on February 2, marking its 10th consecutive rise, however interest rates on mortgages have been steadily fallen in recent months, leaving many questioning why.
Danny Belton (pictured), head of lender relationships at Legal & General Mortgage Club, said that while variable rate mortgages are largely governed by the base rate, fixed rate pricing is influenced by swap rates, a forecast of where the base rate will be in the future.
Rate cuts – the why?
With inflation falling faster than experts expected, Belton said swap rates have not reacted in the same way, and this gradual decline is enabling lenders to reduce their fixed rate pricing too.
“In fact, we are seeing more positive long-term projections for the base rate, meaning that the gap between tracker and fixed-rate mortgages is starting to close,” he added.
Belton said the market has priced in base rate rises based on these long-term forecasts, so he believes short-term money, such as two-year fixed rate products, will of course be more expensive than products with a five-year term.
“The question of where rates will go next is always difficult to predict, given that we cannot say with certainty just how inflation will continue to react,” he said.
The Monetary Policy Committee will adjust the base rate as necessary to return inflation to the 2% target – it has suggested it may implement further base rate rises to 4.5% this year in order to reach this goal.
However, Belton believes the good news lies in the confidence that is returning to the market, giving hope that the base rate may not move greatly, if at all.
Rate cuts – how low will they go?
“While we have seen some positive signs of fixed-rate products priced under 4%, which was not expected until much later in the year, it is still challenging to predict when, and by how much, rates will fall,” Belton said.
Given that rates are highly dependent on inflationary pressures and wider global macroeconomic factors, he believes we can only hope that this promising period continues.
Belton said that competition among lenders may drive rates further down, but these competitive rates are unlikely to arrive in big chunks.
“We are likely to see a drop by five or 10 percentage points here and there, but in today’s climate, larger changes seem unlikely for the foreseeable future,” Belton said.
Rate cuts – impact on customers and the wider market
Belton believes that declining rates are positive news for borrowers across the board, especially given current conditions.
“At a time where rising living costs are squeezing household finances, and presenting a significant barrier to homeownership, falling rates may finally be good news for hopeful buyers concerned about affordability,” he said.
Data from UK Finance has suggested that close to 1.8 million fixed-rate mortgage customers will reach the end of their initial deal rate in 2023. Belton said a saving of £100 or more, compared to what rates were only a short time ago, could provide these borrowers with much-needed respite when remortgaging their home.
“As borrowers weigh up their plans, and get themselves ‘mortgage ready’, consulting a broker to explore their options should be the very first step,” he said.
To that end, Belton believes advisers must also be on hand to support customers who are potentially navigating a shift in their finances and to guide them towards the right deal for their financial needs.
Why do you believe interest rates are falling despite the Bank of England continuing to up the base rate? Let us know in the comments below.
