Have we seen the end of high mortgage interest rates?
This week the mortgage pirate crew have been checking out the recent interest rate drops. We aim to see if they are the real deal or not. Many now hope to have seen the back of high mortgage interest rates
There is a feeling across the mortgage market that the Bank of England were too slow to begin increasing interest rates and that they should have done so well before the full effects of the cost of living crisis were felt. Again many feel that they were also too slow to halt the increases in 2023. However, this seems to have settled down a little with no change over the last two monetary policy meeting.
The Bank of England base rate of interest (BOEBR) does influence the mortgage rates offered across the whole market. However, the relationship between them can be fairly loose. Banks and building societies set their mortgage interest rates themselves. Many factors determine the final interest rate offered, and ultimately lenders are competing against each other for new mortgage business. An increase of 0.25% in BOEBR wont necessarily translate to all mortgage products being increased by the same 0.25% margin. In fact it has been witnessed that some lenders cut their rates even when the BOEBR is increasing.
What is the current trend?
2023 was the year of high mortgage interest rates. However, over the last 4 months or so we have seen mortgage rates offered from the lenders begin to drop. This was despite the Bank of England increasing rates up to 5.25% earlier in this period. As it stands, mortgage rates are at levels lower than we have seen in the last full quarter. Competition between lenders is one reason for this. Many have been sitting in the background for some time, instead of actively competing for business against the market leaders.
However, now that there appears to be a pause in the regular BOEBR increases, relative market stability allows them to release competitive deals to challenge the established market leaders. A competitive market is a strong market. Therefore, we can expect to see small decreases to payable mortgage rates on a more consistent basis across the board. This should last for the next few months until we are into 2024. Or until the Bank of England were to unexpectedly raise their base rate again.
Early 2024 marks the time of year when lenders begin to revise their lending budgets for the coming 12 months. With the financial outlook much rosier than it was this time 12 months ago, expect to see a glut of lenders look to hit the ground running with competitive deals. However, don’t expect this to offer seismic savings as downward progress is expected to slowly trickle through.
Will they continue to drop?
For the next few months at least.
If the BOEBR remains stable at its current level, the fixed rate products offered from the lenders are likely to drop down below this benchmark as a result of the ongoing competition. Underlying sentiment will be that the next BOEBR movement will be downwards. Therefore, there will be little incentive for mortgage lenders to price their ranges upwards. Also as inflation is dropping back at a faster pace, this again will offer more stability when lenders come to price their fixed rate deals for the short and long term. Tracker mortgages will follow the BOEBR up and down, however the margins above or below this rate will be trimmed to maintain parity with the fixed deals.
The only obvious hindrance to rates dropping too far will be if the BOEBR were to increase or remain stagnant for a long period. It doesn’t allow lenders much wriggle room because the average cost of borrowing will remain high. Banks often borrow in order to lend. To this extent something call the swap rate or SONIA comes into play. Check out our guide to mortgage terminology here.
There are clearly many other micro and macro-economic factors that come into play when pricing mortgage products but covering all of those in any real detail would be a constant and endless task. As much as we would like to, it wouldn’t leave us any time for treasure hunting or sailing the high sea.
Summary
So it appears as though high mortgage interest rates (relatively speaking) have peaked and are now on their way down. However please remember that although interest rates will drop, this won’t last, and at some point in the future they will be back where they were or even higher. This is just the nature of a fiscal economy and the ebb and flow of finance markets.
Post compiled by Grant Carpenter CeMAP, CeFA – 15 years of regulated mortgage advice.
Please note that the content listed within this remortgage guide is purely for information purposes only and does not constitute advice.
