Property buyers in the UK, and those looking to refinance this year, may be relieved to know that mortgage rates appear to be stabilizing, and even in some cases, reducing! Following a rocky 2022, the volatility of rates increasing at short notice seems to have settled. For now.
The following article sees Chief Operating Officer of LDN Finance, Greg Cunnington, explore why interest rates increased in the first place and why they are now beginning to reduce.
Why did interest rates rise last year?
The Bank of England’s Monetary Policy Committee (MPC) set a base rate. This base rate is an interest rate that central banks charge commercial banks for loans, therefore directly affecting consumer interest rates. Increasing an interest rate is used as a method to control inflation which, unfortunately in 2022, was at a 40-year high with double digit inflation seen at the back end of the year.
Factors affecting these rates included political instability, the war in Ukraine and the UK’s energy price cap, which increased by 54 per cent in April 2022 to almost £2000. However, if not for government intervention household finances would have been affected even more.
With inflation raising to these levels, it meant the Bank of England had to increase interest rates to help counter this.
Why was my mortgage rate affected?
Although not an exact correlation, the MPC’s base rate is a large factor in what the banks and lenders use to set mortgage rates. Therefore, if this increases, it is likely that the interest rate you are charged will do also (particularly if you are on a tracker or variable mortgage product). If you have a mortgage that charges you a variable interest rate, for example an SVR or tacker mortgage, you might find that the cost of your repayments goes up. However, if you are on a fixed rate mortgage for 2, 5 or 10 years, you won’t see a change until the end of your fixed period.
The base rate also has a strong correlation to SWAP rates. SWAP rates have a large influence on the pricing of fixed rate mortgages. After the uncertainty of the ‘mini budget’ in September 2022 SWAP rates rose dramatically, going over 6% in October, which is why we saw mortgage rates rise significantly higher than the base rate as lenders worked off SWAP rate forecasts. The good news is that SWAP rates have now reduced, currently below 4% on a 5 year period, which is good news for mortgage rates.
Why are mortgage interest rates reducing?
The appointment of Rishi Sunak as Prime Minister helped to settle the financial markets and the average cost of fixed rate mortgages has been continuing reduce following this peak. Back in September, clients were looking at interest rates of around 6%, however, we are starting to see positive changes whereby interest rates are starting from around 4.7%.
In addition, Forbes Advisor reported that at present there are around 4,000 residential mortgage deals on the market vs. 2560 that were seen in September 2022 following political unrest. With severe competition available, lenders are looking for competitive edge.
However, if you are looking for the most competitive mortgage rate it’s important to speak to a trusted adviser. An established brokerage will have access to off-market products that are not available to the public so it’s always worth having a conversation with an adviser to explore what options are available.
In this week alone we have seen mortgage rate reductions of over 0.5% from three of the top ten UK mortgage lenders, meaning things are looking positive. We are also seeing much less volatility and more certainty in mortgage pricing, creating some much needed stability in the market.
2023 housing market outlook
UK house prices fell for a fourth consecutive month in December 2022, the longest downturn since the financial crisis, and an article released by The Business Times reported that economists expect properties to lose as much as 10 per cent of their value this year. With positive signals suggesting that there may be an increase in property purchase, 2023 looks set to be a more ‘normal’ property selling year.
Despite a stabilising economy, mortgage rates are set to remain higher than we’ve seen in previous years. Clients who are remortgaging in the next 12 months will likely see a substantial increase in their monthly payments. But, it’s worth remembering that these will be less than the increased monthly payments clients saw 4 months ago and that the mortgage rates seen in recent years have been at record lows by any historical standard!
The supply and demand issues of recent years have got no better, with real issues on stock and availability in the market compared to buyer demand, so we still forecast a busy property market this year, particularly in London and the South East.
Information is correct as of January 2023.