Mortgage borrowers will be able to breathe a sigh of relief after Thursday’s announcement that the Bank of England has decided to hold rates at 5.25% – but amid the good news was a hint that the cost of home loans may not fall much further.
The Bank’s decision to hold rates was no surprise to the money markets, which are anticipating cuts next year. The consensus is that the base rate will fall to 4% in the next 12 months, but before today’s announcement some economists suggested it could drop to as low as 3.75%.
However, for the second month running, three of the nine members of the Bank’s Monetary Policy Committee voted for an increase, and the central bank said that, if needed, it would take that action to fight inflation. For borrowers, that could mean mortgages are almost as cheap as they are going to be in the short-term.
The money markets’ expectations are already priced into mortgages, which have come down from their most recent peaks, reached in the summer. Last week, the average two-year, fixed-rate deal fell below 6%, and another flurry of cuts over the last few days means the best-buys for the same period are heading towards 4.5%. The cheapest five-year fixes have dipped below that level and are likely to continue downwards, perhaps going under 4% early in 2024.
On top of market expectations comes lenders’ appetite to compete, and this, in part, will be influenced by the outlook for the housing market.
There are signs that the recent downwards movements are luring would-be buyers back towards the market, with surveyors reporting on Thursday that demand had rebounded to a level last seen in April 2022. Asking prices are down, sales are sluggish, and the cost of living is still biting, but it seems likely that activity will pickup as people get used to the new normal for interest rates. Sellers who have sat on their hands because they are not forced to move may be tempted back into the fray, and first-time buyers in cheaper parts of the UK may decide it is time to take the plunge.
This suggests that banks and building societies will feel confident about lending, and could lead to lower rates as they vie for business.
For existing borrowers coming to the end of a cheap fixed-rate deal it could seem worth waiting in case rates go down. But with no one expecting a return to a basement-level interest rates – and the possibility we’re close to the bottom of the current curve – the gains of waiting may be offset by the losses of paying the lender’s standard variable rate (SVR) in the meantime.
SVRs have rocketed with the base rate: Moneyfacts puts the average at 8.19% today, and some are much higher. At Virgin Money, customers who have come off a fix and do not qualify for its loyalty rate will pay 9.49%. When you can fix at half that cost, it is unlikely to be worth staying put.
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With lenders now typically offering the opportunity to fix several months before the end of the deal, if mortgage rates do fall below 4% it might be worth grabbing one as a hedge against inflation. If more cuts come, consumers should be able to move ahead of the date the loan starts, and if they don’t, borrowers can ride out further rises.
