Mortgage Rates Rise Despite Interest Rate Cut
Despite the Bank of England recently cutting its base rate from 5% to 4.75%, mortgage costs are increasing, creating challenges for borrowers. Major lenders including Barclays, HSBC, NatWest, and Nationwide have raised rates on new fixed-rate mortgage deals, contradicting expectations of consistently declining borrowing costs.
Currently, the average two-year fixed mortgage rate stands at 5.5%, with five-year deals averaging 5.22%. Nearly all the cheapest mortgage deals have risen back above 4%, affecting both existing homeowners and potential first-time buyers.
The unexpected rate increases stem from several factors. While the Bank of England’s interest rate cut was widely anticipated, the financial markets have adjusted their expectations based on recent economic developments, particularly the Budget. The Bank suggested that future interest rate cuts might be slower and less frequent than previously predicted.
Mortgage dynamics are complex. Over 80% of mortgage customers have fixed-rate deals, which maintain a set interest rate for a specific period, typically two or five years. Approximately 800,000 fixed-rate mortgages with interest rates of 3% or below are expected to expire annually until the end of 2027.
Lenders price mortgages not just on current interest rates, but on their projections of future rates. Bank of England Governor Andrew Bailey indicated that rates would “continue to fall gradually” but cautioned against cutting them too quickly or extensively.
David Hollingworth from mortgage broker L&C explained that the market is moving towards a “higher for longer” expectation, reflecting increased costs for lenders. However, he emphasized that current rates are not approaching the dramatic peaks seen in recent years.
For borrowers facing these challenges, several strategies can help manage mortgage costs:
1. Make overpayments while on a low fixed-rate deal to potentially save money later
2. Consider moving to an interest-only mortgage to reduce monthly payments
3. Explore extending mortgage terms beyond the traditional 25 years, with 30 and 40-year terms now available
Mortgage brokers advise borrowers to remain vigilant. Aaron Strutt from Trinity Financial warned that best-buy deals are extremely short-lived, and borrowers should carefully monitor rates, especially when renewing with existing lenders.
A Treasury spokesperson maintained that the Budget aims to put public finances on a sustainable path, which they believe is crucial for maintaining steady mortgage rates.
While the general trend suggests interest rates will eventually decrease, the timing remains uncertain. Borrowers are advised to stay informed, regularly review their mortgage options, and be prepared for potential rate fluctuations in the coming months.
The current mortgage market underscores the importance of careful financial planning and adaptability in an evolving economic landscape.
