Despite the Bank of England's latest base rate increase, the mortgage market is looking at a return to stability
The Bank of England’s decision to increase the base rate to 3.5% this week masks a widespread easing of mortgage rates, as lenders’ confidence grows that a period of extreme rate hikes is coming to an end.
In recent weeks, lenders have begun to reduce interest rates on various ranges of mortgage products.
Nationwide and TSB are two of the latest lenders to cut rates, and one expert with nearly 35 years’ experience in the mortgage industry believes the tide has begun to turn, following the fallout of the mini budget.
Why lenders are cutting rates
Danny Belton (pictured), head of lender relationships at Legal & General Mortgage Club, said the market is showing welcome signs of stability since the fallout of the mini budget.
“The pound has grown in strength and gilt yields have somewhat dropped from their peak, having a knock-on effect on the swap rates that largely determine product pricing,” he said.
Due to this significant drop, he said, lenders are returning to the market with attractive rates and in some cases are cutting them by up to 0.50%.
On top of this, he believes there is a more positive longer-term outlook for the base rate, meaning that some five-year fixed-rate products are now cheaper than their two-year counterparts.
“In the coming weeks, we may well see lenders make further reductions, especially if they have lending targets to meet in the new year,” Belton added.
Belton said he expects rates to level off sightly rather than continue to decline to levels seen at the beginning of the year.
Outlook suggests competitive pricing from lenders
Belton said that mortgage applications have naturally slowed in the last month, giving lenders some breathing space to catch up on their pipeline.
However, Belton added, since current demand does not reflect what the market has enjoyed for most of 2022, he believes lenders are likely to maintain competitive pricing to attract the lending volumes they require for 2023.
“At the same time, lenders will need to balance this against saving rates, and the question of where rates will go next is always challenging to predict,” he said.
Instead of a domino effect, he believes it is possible that rates will level off slightly and give way to a less turbulent market next year.
The outlook for future base rate increases
The Bank of England has chosen to increase the base rate at consecutive Monetary Policy Committee meetings throughout the year, and has yet again taken this path with its latest rise, the rate moving to 3.5%.
While the mortgage market has calmed, Belton said the base rate is still the main mechanism to manage inflation and, until these pressures ease, he expects the Bank of England to vote to increase borrowing costs.
“The good news lies in the speculation that it may top out at 3.5% to 4%, which is a far cry from the 6% forecast we heard just a few months ago,” Belton said.
Nonetheless, he said many customers will still be navigating a higher rate climate for the very first time and will require the support of an adviser.
While the best fixed rate mortgages available in today’s market have fallen and are accessible below 5%, this is still a far cry from the beginning of year when rates were available at around 2%, according to data collected by Moneyfacts.
“Against this backdrop, the value of advice has never been more important, especially as many two-year and five-year deals expire in 2023,” Belton said.
Why do you believe lenders have begun to reduce rates and some degree of stability has returned to the market? Let us know in the comments below.
