Mortgage rate price war looms as Bank of England rate cut due

The Bank of England (BoE) is expected to cut the base rate this week thanks to economic storm clouds and talk of a mortgage rate war.

The expectation is that the bank will cut the rate a further time later this year. If, conservatively, the Monetary Policy Committee (MPC) cuts rates in line with a more cautious approach, this would mean the base rate falling by 0.5% (two cuts of 0.25%) – from 4.25% currently to 3.75%. 

The BoE is reacting to a steady stream of negative data. In particular it is looking at current employment falling and the economy, measured by gross domestic product (GDP) flatlining. 

Despite inflation closer to 4% than its mandated target of 2%, it now seems more worried by the economy falling and people losing their jobs.

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Mortgage rate war?

So what does this mean for the mortgage market? It is important to understand that mortgages are affected by the base rate, but they are not beholden to it.

Mortgage providers set their prices with the base rate in mind, but ultimately the rate that they offer to new and existing customers is based on the swap rate market which fluctuates. 

It is also reliant on the lenders’ own requirements. It might be that they want to bring in more mortgage customers, so lower rates to appear attractive. Alternatively, they might also want to keep things steady, which means being less competitive on prices.

If we look at the current data, the market looks quiet – but rates are trickling down. Data from Moneyfacts as of 1 August shows that the average rate for a mortgage was 5.04%. This is down from 5.10% a month before. 

Currently, two-year and five-year mortgage averages are both 5.01%. Both have fallen, with two-years down from 5.08% and five-years down from 5.07%. 

While the market could begin to move again with a fresh base rate cut, it is likely that it has largely priced in this move already.

I need to remortgage

So the big question is, what should you do if it’s time to remortgage? The first thing is to start ignoring what the Bank of England is doing. What matters is what you can find when you shop for a new deal. 

Try looking at least six months before your mortgage is actually due for renewal. Mortgage brokers can be very helpful in this regard as they will help you look at the whole market. Watch out though as not all brokers have access to every product available. 

If you are able to fix at a rate that you find acceptable at that point, great. But chances are the rates could keep falling until you actually need to make that final decision. Keep an eye on things and even call up the broker to check. You are under no obligation to go with the first deal you find and can switch to a cheaper deal if one comes along. 

Finally, one of the biggest concerns at this point will be affordability. Many people are worried about looking for a new deal with a new lender because they might struggle to meet new lending criteria. 

It is easier in that sense to just check the offer from your current lender and accept that, because they don’t need to do the affordability checks. But these deals tend to be more expensive than the best ones available on the market – so you might end up worse off.

Instead, it is essential to remember what made you look like a good borrower when you first got a mortgage – spending discipline and good money habits will reflect well when a lender looks at your background. Again, a broker can help you look at these aspects of your finances to ensure you have the best chance of being accepted possible. 

Photo courtesy of the the Bank of England Flickr