Rate Cuts & Mortgage Rates

[lead]It’s finally happened, the Bank of England has announced a rate cut for the first time since October 2021 when we saw interest rates go from 0.25% to steadily climb to 5.25% until today.

The Bank Of England has announced the first cut, 0.25% and some analysts are thinking that whilst this may be it for the year, others believe that another cut may be on the horizon by the end of 2024.[/lead]

High Interest Rates

Ever since the disastrous economic policy of the Truss/Kwarteng budget, the cost of living crisis has had a significant impact on nearly every aspect of the economy. From lower retail sales to even selling and buying homes, the impact has been palpable.

Since the financial crisis of 2008/9, we have seen the Bank of England hold very low rates and with unprecedented quantitative easing measures, coupled with a global pandemic some decade later, the economy has found itself in position of weak growth, high debt and in return faced tougher economic conditions than many contemporary economies around the world.

The Office of Budget Responsibility points a finger at Brexit impacting on the cost of goods and lack of growth whilst also highlighting the government overspending in certain areas without any calculated growth measures in place.

What does this mean for my mortgage?

Those who have been unfortunate enough to have to remortgage during the shock increases won’t see any difference unless they were on a variable rate mortgage.

This means that the mortgage offer they had when taking on the loan was tethered to the Bank of England’s Interest Rate plus, lender fee. With a cut by 0.25% this will be reflected in the amount that gets paid each month to the mortgage lender.

However for those who fixed the mortgage at the higher interest rate, not much can be done – aside from buying out of the mortgage earlier for a fee – to change.

There are currently over 5 million homes who will see their mortgages come up for renewal by the end of 2024 and nearly 3/4 have been on a fixed rate below 2%. Not cutting would have disastrous effects on the wider generalised economy with mortgage arrears increasing which has been at its highest in 8 years as according to the BOE.

The Bank Of England will have taken this into consideration when making their decision.

3 & 5 Year Mortgages Dropping

Earlier in the week it looked like lenders were expecting a cut with the potential announcement of rates falling.

Nationwide which is the UK’s second largest mortgage lender had already factored in a cut when they announced that their two, three- and five-year fixed mortgage products were being cut by 0.25%. This means that they are finally offering a five-year fixed deal priced at 3.99%. This will be available to new customers buying a home who are looking to borrow up to 60% of the property’s value.

The last time a five-year fixed-rate deal priced at below 4% was available was at the end of February.

For new home buyers this factors in a new level of positivity and certainty in the market. Equally, lenders are looking at the long term forecast of the BOE for the next 3 – 5 years to make sure their lending packages are in line with what is expected. I.e. in 3 years the BOE puts the interest rate at 3.25% so expect to see a 5 year fixed reflecting this rate in some ways.

What about house prices?  

We have seen house prices tick up a little in the last month with the July figure 0.3% higher than in June.

This is quite common as a reduction in rates does have a general house price increase affect. The Nationwide does however warn that certain affordability criteria means that these increases can affect some buyers from entering the market.

We would be likely to see house prices increase for the remainder of the year and naturally, with a new government and monetary policy we will see what general effects this will have on the housing market.

For example, rent fixes is an idea that has been floated around for some time to mimic other European countries; however, this would have other consequences in the marketplace. Essentially we need to wait and see what the government does in the Autumn statement to understand what impact this could have on the housing market.

What about remortgaging?

For those who are remortgaging from low rates the news is a little more mixed. Many lenders will be passing on the cuts but additional fees could be higher.

What’s the best advice for my mortgage?

For home buyers and those remortgaging you need to seek professional advice. We use a brokerage service from Simon Poole who can advise on where you and your money can be best put to use.

Mortgage brokers often get rates and packages which aren’t available on the high street and can meet the certain criteria for higher lending offers. For example some people may be forced into a 90% mortgage rate and this requires specialist lender services which high street banks and mortgage lenders won’t have on offer.

Our last word

This is all essentially good news with a slight caveat.

The economy is perceived to be doing better than where we were in October 2021 and that inflation remains the key principle of the Bank of England. Rate cuts would indicate a feeling that inflation is more sustainable however, a small cut also indicates that rates like the ones during the pandemic of 0.1% won’t be seen for a very long time if ever again.

When buying a home it’s important to remember that you are buying a place to live. Where you can share and build memories and become part of a community.