BoE reduces base rate, lenders increase fixed rates… are you keeping up?
If you were to ask a broker how things are going in the mortgage industry currently, they might casually remark, “Up and down” – and it’s a generic expression that couldn’t be more apt, for while the Bank of England has cut the base rate to 4.75%, some lenders are conversely increasing their fixed rates.
The Monetary Policy Committee’s 0.25% cut to the base rate yesterday, dropping it back below 5% for the first time since June last year, was widely anticipated, and, while borrowers may welcome it, some uncertainty persists in the market about the direction of travel.
David Hollingworth (pictured left), associate director at L&C Mortgages, believes it will help continue the downward trajectory for interest rates, potentially into next year – but sounds a cautionary note.
“The focus will be on whether the mood has changed in terms of how sharply rates might fall and whether the path may not be as steep or fall as far as previously expected,” Hollingworth said.
“Most borrowers have continued to fix their rates to benefit from the lower rates they offer when compared with variable rate deals. Counter intuitively, those fixed rates have been nudging upwards despite the cut to the base rate, as the market perception of the inflation and rate outlook has shifted.
Last week’s Budget and the election in the United States, this week, have added a hint of uncertainty around future rate movements, believes Hollingworth. This has already caused a flurry of price changes to feed through, with most resulting in fixed rates being hiked, and will likely continue, he suggests, unless markets are reassured by the Bank’s decision and funding costs ease back.
“In the meantime, lenders will continue to readjust their rates to find the right balance and the level at which the market will settle,” Hollingworth said. “Any borrower agonising over whether to take a fixed rate now should reach a decision sooner rather than later. There are still some extremely sharp rates on offer with some rates still available below 4% but these are bound to be feeling the pressure. We will see how lenders pass through the latest cut to standard variable rates.”
What will be the impact of the base rate cut?
Gerard Boon (pictured second from left) , managing director of Boon Brokers, believes a marginal cut in the base rate should boost demand in the economy without spooking the markets.
“The Bank of England is yet to see the inflation data following the Labour government’s autumn Budget,” observed Boon. “However, due to the significant austerity measures imposed on businesses via increased taxes, the Bank of England will be concerned that demand in the UK’s economy will sharply fall. If the inflation rate continues to fall, rather than increase to their 2% inflation rate target, we may see a further 0.25% or 0.5% base rate cut in the MPC’s next meeting.”
For Joela Jenvey (pictured second from right), mortgage and protection consultant at Nurture FS, the base rate cut may stabilise and encourage a reducing swap rate trend, influencing lenders’ costs of funding.
“We have seen the gap between two- and five-year fixed rate money lessen over the last three weeks,” Jenvey said. “This combined with home mover and remortgage customers opting for shorter term fixed rates could mean we will see more competitive pricing across shorter fixed-rate mortgages, and lenders beginning to reprice down again, providing much-needed relief for borrowers. This could benefit those on the cusp of remortgaging or first-time buyers or clients with existing submitted applications. While rates may not return to the historically low levels of previous years, this is certainly a step in the right direction for affordability and stability in the housing market.”
Michelle Lawson (pictured right), mortgage and protection adviser at Lawson Financial, is seemingly less impressed, describing the base rate reduction as ‘the worst kept secret’.
“For the mortgage market it will only affect those on trackers so this is not a big win for mortgage holders on fixed rates as this would have already been priced in via swap rates,” commented Lawson. “What should be noted is that two lenders, Santander and Virgin Money, are not reducing their existing borrower tracker payments until December 28 and January 1 respectively, around eight weeks after the event. During the bank base rate increases, Santander were increasing payments the following month.”
Read more: ‘Rates and inflation are coming down - the mortgage market is cyclical'
How are borrowers responding to market movement?
Data from Mortgage Advice Bureau shows that falling rates have already impacted borrower preference. Last month, over half - 54% - of borrowers opted for a five-year fixed rate, an increase of 11% versus the same period last year, indicating a change in customer mindset
“We could see swap rates and, consequently, mortgage rates fall, subject to markets settling further following the budget and the outcome of the US election also,” suggested its deputy CEO, Ben Thompson. “It will be interesting to look again at this after the dust has settled following the budget and the outcome of the US election, and their combined impact on mortgage pricing.”
Given that inflation remains around the Monetary Policy Committee’s 2% sweet spot, the cut wasn’t a surprise, according to Karl Wilkinson, CEO, of mortgage and protection brokerage Access Financial Services.
“The BoE interest rate cut is solid evidence that years of inflationary shocks have now been put to bed,” said Wilkinson.
“We’ll be interested to read the Bank’s latest quarterly economic forecast to see what effect they think that the increased government borrowing that Chancellor Reeves announced in the Autumn Budget will have on future rate cuts. Moving forward, we’ll probably see fewer cuts than previously expected due to the extra inflationary pressures, rises to the national living wage and employers’ national insurance.”
Mark Harris, chief executive of mortgage broker SPF Private Clients, meanwhile, notes a slight increase in mortgage rates, and urges existing borrowers to engage with a whole-of-market mortgage broker approximately six or seven months prior to their current deal ending to lock-in a new deal.
“We expect the MPC to continue on the anticipated path for base rate with further reductions in coming months,” Harris remarked. “However, what cannot be guaranteed is where rates end up, nor the pace it takes to get there.”
