The CEO of Octane Capital, Jonathan Samuels, has issued a warning: don’t bank on mortgage rates dropping or even staying the same after the Bank of England’s latest decision to keep interest rates on hold. This news has rippled through the mortgage market, challenging the optimism that had been slowly building over the past year.

On February 1st, the Bank of England’s monetary policy council chose to maintain the current interest rate at 5.25%. This decision was not taken lightly, as it directly impacts the cost of borrowing for millions of Britons. Jonathan Samuels highlighted that while this move had previously helped boost buyer confidence by keeping rates stable, there’s a twist in the tale this time around.

A Look Back at the Positive Trends

In 2023, the Bank of England held interest rates steady three times, a strategy that was credited with bolstering confidence among buyers. The mortgage market responded positively, with swap rates — the interest rate banks charge each other for fixed-rate loans — decreasing significantly. From July to December last year, the average one-year swap rate dropped from 6.09% to 5.2%, and the five-year swap rates saw a reduction to 4.32% from 4.48% in November.

This downward trend in swap rates led to a welcomed decrease in mortgage rates. For example, the average rate for a two-year, fixed-term mortgage at 75% loan-to-value (LTV) fell from 5.43% to 5.03% over the past year. This reduction in mortgage rates rejuvenated the housing market, with mortgage approvals increasing for three consecutive months following the decision to maintain the base rate at 5.25% in September of the previous year.

The Latest Curveball

However, the latest decision to keep the base rate unchanged has not been met with the same optimism. Contrary to expectations of a rate drop in January, Octane Capital’s analysis shows that five-year swap rates have started to climb, increasing by an average of 0.27% daily this year. This is a significant reversal from the decline seen at the same time last year.

Samuels warns that with the market’s expectations now adjusting to a continued freeze on interest rate changes, the recent rise in swap rates is likely to persist. This could mean that mortgage rates, which often follow the lead of swap rates, might start to increase as soon as February.