When the Bank of England’s Monetary Policy Committee raised its base rate by 0.75 percent to 3 percent earlier this month, the reaction was muted.
Some expected mortgage rates to rise in the wake of the decision, as each of the eight times the Bank has raised the base rate since December 2021.
But while tracker mortgage rates have risen with the rate hike, fixed rates continue to fall from the highs they reached after September’s ill-fated mini-budget.
Lenders including Platform, Yorkshire Building Society, HSBC, Halifax, Lloyds and NatWest have cut their fixed rates in the past week.
The two-year average correction, which peaked at 6.65 percent on Oct. 20, according to Moneyfacts, now stands at 6.28 percent (Nov. 14), while the five-year correction, which hit a high of 6.51 percent, now stands at 5.07 percent. penny.
Fixed-rate mortgages have started to fall since last month after rising sharply
In part that’s because gilt yields, which dictate the cost of government borrowing and affect mortgage rates, have fallen back to pre-mini-budget levels.
In addition, market predictions for how high interest rates will be next year have been cut significantly with most expecting the base rate to peak at 4.5%, 1.5% lower than expected after the ill-fated September mini-budget.
So some mortgage brokers are predicting that five-year fixed mortgage rates will drop back below 4 percent in the New Year.
Mark Harris, chief executive of mortgage broker SPF Private Clients, says: “The price of fixed-rate mortgages has been falling in recent weeks and if this continues, we would expect five-year fixes below 4 percent by early 2023”.
‘With lenders reporting declining volume and activity thanks to higher rates, it’s a trend we expect to continue.
“That desire for channeling and the falling cost of funds will incentivize lenders to lower rates further, which will be good news for struggling borrowers.”
Where are the rates now?
Following the September mini-budget presented by then-foreign minister Kwasi Kwarteng, gilt yields soared, raising the cost of borrowing for banks.
In response, lenders raised their own mortgage rates, making sure they weren’t locked in by the sharp rise in the cost of credit by passing it on to their customers.
Before the mini-budget on Friday, September 23, the average two-year fixed rate across all loan-to-value tranches was 4.74 percent and the five-year fixed rate was 4.75 percent, according to Moneyfacts.
The rates now sit at 6.28 percent and 6.07 percent respectively, both having fallen since the base rate announcement on November 3.
The consensus is that fixed rates are falling, despite the Bank of England hike, because lenders had already priced in future increases.
Chris Skyes, chief technical officer at mortgage brokers Private Finance, said: “We hope this fixed rate pricing direction will reassure some borrowers, as this activity from lenders suggests that some level of base rate increase has already been made.” taken into account in the pricing of fixed mortgage rates.’
Where are the mortgage rates now?
The average two-year fixed rate agreement is now 6.28 percent, according to Moneyfacts.
On a £200,000 mortgage that means monthly payments would be £1,323, £49 less than on November 1, when the rate was 6.47 per cent.
There has been a similar trend in five-year fixed-rate agreements. The average rate has fallen 0.25 percent since the start of the month to 6.07 percent, saving £31 a month on a £200,000 mortgage.
This month Platform, the mortgage arm of The Co-operative Bank, has released new mortgage rates that put several of its five-year fixed rates below 5 percent.
And it is not the only one that lowers rates. Yorkshire Building Society has cut its rates by as much as 0.38 per cent, with its lowest price now at 5.34 per cent on a two-year fixed contract.
HSBC has cut its rates by as much as 0.29 percent, citing the reduced cost of borrowing as the reason behind the decision.
Virgin Money has also lowered its rates. The most significant cut has been to its five-year fixed rate on a 15 percent deposit, which has been cut by 0.34 percent to 5.29 percent.
Bank of England Governor Andrew Bailey said the next rate hike is unlikely to be as high as the market has priced in and should settle mortgage rates.
Currently, the best home purchase offer on the market is a five-year fixed rate at 5.19 percent, according to the latest data from Defaqto. For low-deposit mortgages, the best deal has dropped markedly in recent days.
On November 9, the best two-year fixed offer on a 5 percent deposit was 6.24 percent, on November 11 it fell to 5.99 percent.
On a £200,000 mortgage, the rate reduction reduces the monthly payment from £1,318 to £1,287 and saves £31 per month.
If borrowers are prepared to take a longer-term solution to secure a lower rate, First Direct offers a 10-year fixed-rate mortgage at 75 percent loan-to-value for 5.04 percent.
Yet even as rates are falling, lenders are reassessing their affordability calculations as inflation remains in double digits at 10.1 percent in September.
As the cost of living rises, they may decide to place stricter limits on the income they require from borrowers to ensure they can afford their payments.
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Where will the fees go next?
Swap rates, the contract by which lenders ‘swap’ payments from fixed to variable interest rates to offset the risk of a fixed rate, have fallen in recent weeks, indicating that lenders have moderated their view of higher interest rates in the future.
Gilt yields, which affect the cost of home borrowing, have also fallen, but mortgage rates aren’t falling as fast.
Added to this, there is still a significant amount of uncertainty in the market. This includes the Chancellor’s autumn fiscal statement on November 17 and the likelihood of another Bank of England rate hike when the Monetary Policy committee meets on December 15.
However, there is an emerging view that, at least for now, mortgage rates will continue to fall.
In his news conference following the base rate announcement, Bank of England Governor Andrew Bailey said the next rate hike was likely to be as high as the market had already priced in, adding: “That’s Important because, for example, it means that rates on new fixed-term mortgages shouldn’t have to go up like they have.’
Justin Moy, managing director of broker EHF Mortgages, said: “As money markets have improved in recent weeks, this has meant that the cost of money has also come down, and those savings are now being passed on to holders of mortgages”.
‘There will be more changes from other High Street lenders but we expect the market to stabilize, rates to stabilize over the next few months and in a ‘near cartel’ fashion most lenders will have similar products so no lender it takes too many applications.’
Craig Fish, founder and director of Lodestone Mortgages & Protection, says that while rates have started to come down, the pace of change is “slower than brokers would like.”
He said: ‘As expected, lenders have started to cut their rates, and I strongly suspect they will continue to do so, as we begin to see the start of a rate war between lenders.
Lenders often vary rates to manage workloads, so while this may be partly the reason, it could also be that many lenders have nearly reached year-end loan goals and therefore They are not looking to accept much more business. I would expect to see a very positive start to next year.’
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