Wednesday 24th July 2024

The ‘new normal’ for mortgage rates

Mortgage customers have faced a massive swing in the cost of borrowing in the past two years. Mouthy Money editor Edmund Greaves interrogates top mortgage professionals to find out what happens next.

The mortgage market was a largely quiet place for more than a decade.

Setting the scene of how we got to this point, before the Great Financial Crisis (GFC) began the Bank of England (BoE) increased its base rate to 5.75% in July 2007.

Once the GFC began, the base rate fell precipitously as the BoE sought to kickstart the economy, plummeting to just 0.5% by 5 March 2009.

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From this point, the base rate didn’t rise above 1% for just short of 13 years – an extraordinary period of low rates.  

Move forward to today and the situation couldn’t be more different. Post-pandemic inflation and energy crises sent the base rate soaring to quell price rises. It now sits at 5.25%.

Why this matters for mortgages

The base rate doesn’t directly affect the market for mortgages. Mortgages themselves are priced in the UK by what are called ‘swap rates’. Banks and other lenders use swap rates to manage their exposure to the central bank rate.

The effect of a rising bank rate has been to significantly increase the cost of borrowing for all types of credit. But mortgage rate increases have been especially painful for new homebuyers because they form such a large proportion of household budgets.

Rising mortgage rates mean prospective buyers have to absorb higher monthly payments or find more affordable property. Those remortgaging are finding themselves with significant payment increases and potential difficulty meeting affordability criteria.

Now however, the economy looks to have overcome the worst of the inflation crisis. So the big question looming now is whether mortgages are going to get significantly cheaper again, as the BoE looks to decrease its base rate.

The issue here is that the BoE base rate doesn’t correlate perfectly with pricing trends in the swap rate market. This makes discerning what happens next in the mortgage market more complicated than it would appear.  

When can we expect a base rate cut?

Mouthy Money called together a group of mortgage market experts to gauge their views on what happens next in the mortgage market where interest rates are concerned. The group were somewhat divided on the near-term implications for rates this year.

John Davison, head of product, proposition & distribution at mortgage lender Perenna, says political uncertainty surrounding the potential outcomes of various countries’ elections will have an impact on where swap rates move. This is a bigger geopolitical issue than just the UK.

“We’ve got an interesting Summer ahead of us,” he says. “If the polls are to be believed we are likely to have a change in government in the UK quickly followed up by a budget, an election in France and an election in the US which will feed into swap rates over here in the UK, so there is an awful lot happening before the end of the year.

“Swap rates are pricing an assumed base rate cut of either 0.25 or 0.5% before the end of the year. The outcome of the election and the content of the budget will influence whether it comes in September or October.”

Polly Gilbert, co-founder at digital mortgage broker Tembo agrees, but is plaintive in light of potential rate cut delays: “I have been holding out hope that it would be August. But there is so much uncertainty ahead.”

Gilbert is concerned a new government could choose to take more painful decisions quickly in order to maximise their electoral mandate, which could increase some economic uncertainty.

She adds: “The cynic in me thinks that, if elected, Labour will introduce some of its more grisly and unpopular policies first which could create even more turbulence. Even so, I would like to say the first cut will come on September.”

However, mortgage expert Roger Morris points out that rate cut expectations have had bad form for delays recently. This comes as the key economic factors, such as employment and GDP, which would persuade the BoE to cut have left the situation looking more puzzling.

“I think there will be a bit of a twist to this,” he says. “In December 2023 there was a real sense there would be at least three base rate cuts this year. The BoE were even doing mini summits around the country saying we were going to get that reduction.

“Headline inflationary data may prove to be more disappointing than hoped. I think it won’t be until the latter end of the year that we will see a base rate drop. I still think we are a little way off yet.”

With inflation returning to normal levels and economic growth stalling, many interest rate watchers had expected a BoE cut in June, but this failed to materialise. The BoE’s Monetary Policy Committee (MPC) faced criticism for shying away from cutting the rate at a politically contentious time, with the General Election in full swing.

But Steve Mannakee, national account manager at specialist mortgage lender West One, says in reality there was never likely to be a June rate cut. He thinks the political delicacy of the General Election, despite the inevitability of the result if the various polls are accurate and what the winning political party enacts, is reinforcing a ‘wait and see’ attitude in both the BoE and markets.

“I don’t think there was ever going to be a June BoE base rate reduction,” he says. “The base rate hasn’t gone down as its too politically sensitive for the BoE to do that, but I don’t think it was going to happen anyway.  

“I was also holding out for August but we are almost certainly looking further into the Autumn, likely following the results of a new Government Budget.”

What will interest rates look like in two years?

Our experts would seem to agree broadly that the base rate will start to come down later this year, despite some differences on the specific timing.

But what about the longer term? Mortgages are a strange product compared to say, insurance. We’re all accustomed to the annual dance of insurance renewals, for instance. Get a bad renewal price from your provider and you’re free to shop around.

Mortgages are a longer-term product though, with deals typically fixed for two, five or 10 years. The market is also changing to include even longer mortgages running as much as 40 years in some cases. This makes taking a decision on what type of deal to get a more complex and consequential decision for households to make.

Davison is emphatic that borrowers shouldn’t anticipate big declines in rates for mortgages in coming years, despite the rock-bottom rates of the 2010s until recently being the norm. He also cautions that the base rate and mortgage swap rates are not inextricably bound together.

“We had 10 years of very low mortgage rates. There’s talk of base rate drops of 0.25-0.5% this year, but that doesn’t mean fixed rates are going to come down. The media likes talking about mortgage rates coming down when base rate comes down, but that doesn’t always work in practice.

“Lenders have already priced base rate expectations in. Lenders are currently lending on swaps that are expecting those rate drops to happen. What we have seen over the last two months are rates fluctuating up and down in reaction to the BoE pushing those rate drops back and back and back.”

Gilbert agrees with Davison’s caution over media hype around the base rate, and the overegging of its impact on mortgage rates.

“It’s interesting how the base rate announcement has become such a media moment,” she says. “We see big spikes in activity at Tembo after base rate announcements and that does concern me. There is this sense it will always be the next announcement that will bring a cut.

“That is heightened now as we have hit the inflation target. People are feeling good about that, there are a lot of people asking questions as to why the base rate wasn’t cut last time. To me it was obvious that it wasn’t going to come.

“There is a ‘held breath’ feeling at the moment for our customers, especially among first-time buyers, and people are looking to sell their property. It drives a feeling that when the base rate changes it will be a huge watershed moment where rates will start dropping to 3.2%-3.5%. As an industry we have a role to play in educating people on the reality.”

Roger Morris can see average rates declining to around 4%, but this he warns is dependent on major geopolitical and economic factors, which the UK has little control over.

“The BoE thinks there is still some education needed for families that we aren’t going to get a big drop anytime soon. In two years’ time I think we will get to 4%-4.25%.

“There is some speculation over that period that we could get as low as 3.75% but it depends on the performance of the UK economy. There are so many other geopolitical events that impact mortgage pricing these days and so I think if we get to that 4%-4.25% level we’ll be doing well.”

Davison agrees: “Assuming the base rate stabilises around 3.5%-3.75%, you are still looking at mortgage rates that start around 4% for most products. This is the new normal.

“We are going to see innovation in product availability and types but this is probably the new normal for rates. They aren’t going to come down from much further than where they are now.”

Photo by Karolina Kaboompics

Edmund Greaves


Edmund Greaves is editor of Mouthy Money. Formerly deputy editor of Moneywise magazine, he has worked in journalism for over a decade in politics, travel and now money.

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