Recent data reveals that homeowners switching to a different mortgage lender, a process known as remortgaging, has dwindled to its lowest numbers since 1999. This slump can be directly linked to the increased costs of borrowing. But what has led to this rise in borrowing costs?
Inflation’s Role in Setting Interest Rates
Persistently high inflation, clocking in at 6.7%, has influenced the Bank of England’s monetary policy decisions. To counter this inflation, the Bank has opted to maintain a relatively high interest rate, with expectations to hold it at 5.25% in the upcoming review. This level is significant, considering that it had risen from a mere 0.1% in December 2021, with an astounding 14 rate hikes within that period.
However, the silver lining here is that many experts and investors believe that we’ve seen the peak. With speculations suggesting that the first potential rate cut might only be in sight by August, it’s clear that the high borrowing environment is here to stay for a while.
The Property Market’s Response
This borrowing environment has undeniably placed a stranglehold on the property market. A clear indication is the reduced number of homeowners getting remortgage approvals from different lenders. Last month, only 20,600 such approvals were granted, hinting that many are sticking with their current providers, possibly due to not meeting the stricter affordability checks imposed by potential new lenders.
Furthermore, mortgage approvals in general have seen a downturn for the fourth consecutive month, with a mere 43,300 approvals in September. Many potential buyers are holding back in the hope of a more favourable interest rate environment and further drops in property prices.
Speaking of property prices, recent data from Zoopla, a reputable property search website, indicates a 1.1% drop in house prices over the past year. The primary cause? The stifling effect of high mortgage rates on buyer demand.
Lenders React to the Climate
In the wake of the Bank of England’s decision to pause its interest rate hikes, several lenders took the cue to reduce their mortgage rates. Notable names such as Halifax, Nationwide, and Santander announced rate cuts in October.
However, it’s important to note that even with these reductions, many individuals coming out of their fixed-rate mortgage deals might find themselves facing increased monthly repayments. This is because they’re transitioning into these higher interest rate environments. As of the latest figures, the average five-year fixed mortgage rate stands at 5.87%, as reported by MoneyfactsCompare.
Moreover, the Bank of England stated that the effective interest rate for new mortgages in September had climbed to 5.01% from the 4.82% recorded in August.
Alice Haine, a prominent figure from the investment platform Bestinvest, highlighted the challenges homeowners are facing. She remarked on the noticeable jump in repayments for many individuals who previously secured advantageous deals prior to this tightening cycle.
The Road Ahead
The Bank of England’s decision-making isn’t solely based on the property market or the borrowing landscape. They’re also keeping a vigilant eye on the jobs market to discern whether inflationary pressures are waning or persisting.
Governor Andrew Bailey provides a crucial insight into the Bank’s future actions, indicating that a decline in interest rates should not be anticipated until there’s concrete evidence pointing towards a deceleration in inflation.