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The recent announcement from the Bank of England (BofE) takes the Bank’s Base Rate to 4%. Whilst this is yet another rise, it doesn't necessarily mean it's more expensive to get a mortgage.
Lenders have been anticipating ongoing rises in interest rates. The news has been full of speculation and anticipation of ongoing interest rate rises for several months, which has allowed lenders to forecast.
The ‘Base Rate’ is set by the Bank of England and is the interest rate it charges to other banks and financial institutions when they borrow money. It’s also used to control inflation.
The BofE has said it would continue to raise the Base Rate to help combat high inflation. The Government sets the Bank of England an inflation target of 2%, but the current level is much higher, at 10.5%.
The BoE Base Rate is forecasted to increase in the first half of the year, but not by as much as the market first thought in the aftermath of last year's mini-budget. This month’s 0.5% increase has already been factored into market forecasts. The current view is that Base Rate may rise to about 4.5% by the Summer when it’s expected to peak. And after that, it’s thought they should start to come down.
Mortgage rates started to fall toward the end of last year. And even if the Base Rate goes up, mortgage rates are expected to keep going down.
This is because we’re now back in a period of relative stability, compared to the period after the mini-budget proposals were announced in September, which shocked the markets, and many lenders withdrew mortgage products from the market.
But lenders have now priced in higher interest rates, so even though the Bank’s Base Rate increased again in November and December last year, mortgage rates have been gradually reducing from the previously high levels they were at after the mini-budget announcements.
“The mortgage market is now looking more positive compared to the last three months of 2022, which should give people more certainty and confidence ahead of the traditionally busy spring home-moving season,” says Rightmove's mortgage expert Matt Smith.
“There’s some good news for buyers, as lenders are competing for business and have been reducing their rates further in January. Most five-year, and many two-year fixed-rate deals are now being offered below 5%, compared to more than 6% at their peak in October last year,” he adds.
The pace at which mortgage rates have been cut over the last few weeks is a clear indication that there is growing competition among lenders. This can only be a good thing for borrowers, as it will mean more choice and availability of mortgage products. This should reassure people that UK lenders can, and will continue to lend.
If you’re among the estimated 15% of borrowers with a variable or a tracker mortgage, your monthly outgoings will almost certainly go up. The interest rate paid on tracker mortgages is usually anchored against the bank base rate, plus a set percentage. For example, the current base rate of 4%, plus 1%, would mean you’d now be paying 5% interest.
But you may get the benefit of lower rates if they start to fall later in the year, as expected.
If you have a fixed-rate deal, the good news is that your monthly repayments won’t change, at least until your current deal ends.
If your fixed-rate deal is due to end within the next six months, you could see what your options are for locking in a deal now.
Mortgage rates were a lot lower two years ago, and depending on your individual circumstances, it’s likely that the rate you’re offered now will be higher than your current deal.
Before inflation started to build last year, two-year fixed-rate mortgage products tended to be cheaper than longer-term deals. Now, due to the impact of higher Base Rates in the near term, the cost of borrowing money over two years is higher than five-year fixed rates. Locking in a five-year deal on a cheaper rate could bring the costs down and give you certainty about the cost of your monthly repayments, for longer.
Many lenders will allow existing customers to apply for new deals up to six months before their current rate ends, without having to pay an early repayment charge. This is often called ‘product transfer’ or ‘switching’. This is a relatively easy process as you’re staying with your existing lender, so you won’t need a solicitor or a property valuation, and there’s no need to prove your income.
If you’re looking to move lenders – whether you’re remortgaging or moving home – you may want to start well before your fixed-rate deal ends, as the application process can take several months or more.
Ask your lender what they can offer or speak to a an independent financial advisor to find out which deals are available to you.
If you don’t do anything, at the end of your deal you’ll automatically move on to the lender’s Standard Variable Rate (SVR). These rates tend to be higher than other mortgage rates and are generally changed to reflect movements in the Bank of England’s base rate.
For personal, we offer up-to-date mortgage advice, and would be happy to introduce one of our trusted partners.
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