The Bank of England has maintained its base interest rate at 5.25%. This decision marks the fourth consecutive pause since September, following a series of 14 rate hikes beginning in December 2021. Let’s break down what this means for you, especially if you’re dealing with mortgages.
The primary objective of increasing the base rate has been to curb inflation, which has impacted various aspects of household spending, including mortgages, energy bills, and groceries. Inflation soared to 11.1% in October 2022 but started declining consistently from February to November 2023. The unexpected inflation uptick in December 2023, however, altered expectations of a rate cut.
The Bank of England has implemented 15 base rate hikes since December 2021, driving down inflation from a high of 11% in 2022. Despite these efforts, inflation remains above the Bank’s 2% target, a goal they don’t see being reached until late 2025. By raising borrowing costs, the Bank aims to reduce demand and slow economic money flow, theoretically encouraging savings over spending.
Future Rate Cuts – What to Expect?
Recent forecasts have scaled back the peak base rate expectations from 6.5% to the current 5.25%. While further increases aren’t off the table, predictions lean more towards rate cuts in 2024, with some investors anticipating up to five reductions, beginning as early as May or June. These forecasts, however, vary among experts, considering global geopolitical tensions and secondary inflation effects.
Impact on Mortgage Borrowers
Higher Mortgage Costs
The increased base rate has led to costlier mortgages, significantly affecting those needing to remortgage. Approximately 1.6 million borrowers are expected to transition from their fixed-rate mortgages this year, facing higher rates than before.
Current Mortgage Rates
The average two-year fixed mortgage rate is currently 5.56%, and the five-year fix stands at 5.19%, significantly higher than past rates but showing a downward trend from December’s averages of 5.99% and 5.59%, respectively. For instance, on a £200,000 mortgage, monthly payments could jump from £885 to £1,235.
The Silver Lining
Despite higher averages, more favorable rates are available, especially for those with substantial deposits or home equity. Rates as low as 4.17% for two-year fixes and 3.90% for five-year fixes can be found with the help of a mortgage broker. Lenders’ rate changes appear to be stabilising, though some slight increases are noted.
Those on tracker and variable rate mortgages might feel disappointed with the base rate’s stability. Tracker rates adjust with the base rate, while standard variable rates are subject to lender discretion, often following base rate trends.
Fixed Rate Mortgages
Banks tend to adjust their fixed mortgage rates based on future base rate predictions rather than current rates. This is reflected in the swap rates, which lenders use to price mortgages. Although there’s been a recent uptick in swap rates, the long-term outlook suggests a gradual reduction in mortgage rates through 2024.
Key Takeaways for Mortgage Holders
- Stay Informed: Keep an eye on market forecasts and bank predictions.
- Consult Experts: Speaking to a mortgage broker can reveal more favorable rates.
- Prepare for Changes: Those on variable rates should brace for potential fluctuations.
- Look Ahead: For those on fixed rates, it’s more about future rate predictions than the current base rate.
In conclusion, while the Bank of England’s decision to hold the rate might not bring immediate relief to mortgage holders, the market’s future outlook and recent rate trends suggest potential easing in the coming months.