15 August 2023 – Despite the Bank of England raising interest rates to 5.25% at the beginning of the month, in the last few days we have seen major lenders lower their mortgage rates.
When the Bank of England (BoE) raised the base rate for the 14th consecutive time on 3rd August, mortgage rates further rose, pushing fixed rates close to 7%. At a 15-year high, the high mortgage rates were at the heart of the slowdown of the property market.
However, in the last few days we have seen major lenders lower their mortgage rates on new deals, showing the financial market is optimistic about interest rates soon reaching their peak.
Lenders who recently have cut their mortgage rates include Halifax, Nationwide, NatWest, HSBC and Santander.
More Competition And Fewer Customers Push Down Rates
According to Moneyfacts, the average mortgage rate for a two-year fixed mortgage is now 6.8%, at the same level it was three weeks ago. The average rate for a five-year mortgage is at 6.28%, which is about the same level as a month ago.
This doesn’t just impact on first-time buyers, but also the 1.5 million homeowners whose fixed-rate mortgage is up for renewal by the end of next year.
It might come as a surprise to many that some high street lenders decided to lower their mortgage rates, despite the BoE recently raising interest rates.
But commentators see this as a sign that lenders believe that interest rates won’t stay very high for as long as initially thought.
Recently published inflation data was better than expected. Combined with relatively stable swap rates, which underpin mortgage rates, lenders seem more confident.
However, it’s too early to know if the downward trend of mortgage rates will continue. A new set of inflation data is due to be released this Wednesday, which will give an indication about future interest rate movements.
If inflation doesn’t fall as expected and instead remains stubbornly high, the confidence lenders have at the moment could quickly disappear again.
With potential for further base rate rises, and the continuing fluctuation of other factors that influence the rates offered to buyers, it is difficult to predict if we have reached a turning point.
James Hyde, Press & PR Manager at Moneyfacts
But there is another reason why lenders have lowered their rates. Because borrowing costs have risen sharply in the past year, the property market has slowed down with the number of transactions falling.
This means that fewer people are applying for mortgages. As a result, competition between lenders becomes fiercer as the pool of potential customers becomes smaller.
So in order to attract more potential borrowers, the big high street lenders are lowering their rates. This will especially attract buyers who may have put their plans to buy on the back burners due to high mortgage costs.
So while competition is likely to put a downward pressure on mortgage rates, it is unlikely that we will see rates below 2% any time soon again. And if inflation doesn’t fall, then mortgage rates might start to rise again.
A Buyers’ Market
Despite high mortgage rates, the current market does favour the buyers rather than the sellers, according to Northwood estate agents.
While many buyers have to adjust their wishes to their tighter budget, there is still activity on the property market, with first-time buyers still keen to buy.
But some evidence shows that they are looking for smaller houses in cheaper areas to keep mortgage payments at an affordable level.
Buyers are also taking mortgage costs into consideration when making an offer. And they are confident enough to offer below the asking price. This puts sellers in a difficult position.
Holding out for more could mean it will take much longer to sell their house. But accepting a lower offer could mean they can’t afford what they want in their onward purchase.
Many potential buyers are also delaying their decision to move until there is more stability in the mortgage market. This reduction in demand ensures that it remains a buyers’ market.
So it is good news for both sellers and buyers that major lenders lower their mortgage rates. Buyers will be able to afford bigger homes and sellers will have a bigger pool of potential buyers.
However, it has to be kept in mind that mortgage rates have risen quite sharply in recent months. So in order to make buying a home more affordable again, it will be necessary that rates fall a few more times.
There is no doubt mortgage rates need to reduce a few more times before most borrowers will be happy.
Aaron Strutt from Trinity Financial
Usually, people don’t pay much attention to inflation data, but this time, buyers and sellers will be eagerly awaiting its release. It will be the basis for many lenders to lower their mortgage rates or raise them again.
