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"The return of the sub-5% 5-year residential fixed rate is now looking imminent"

Journalist: Riz Malik

ended 15. September 2023

With SWAP rates slowly edging down in recent weeks, brokers have suggested that the return of sub-5% fixed rates is not far off, even if the Bank of England hikes rates by 0.25% next week. Equally, all agreed much will depend on Wednesday's inflation print.

Andrew Montlake, managing director of the UK-wide mortgage broker, Coreco, said: "With mortgage lenders now battling for market share and wanting to make a stellar start to the new year, we can expect to see continued rate and criteria improvements over the next quarter. The return of the sub-5% 5-year residential fixed rate is now looking imminent. Much now rests on the next inflation report, and we can only hope that the Monetary Policy Committee opts to pause, or at most raise by 0.25%, even if the inflation data is not quite what was expected, rather than unleashing more damage on the economy.”

Kylie-Ann Gatecliffe, director at Selby-based independent mortgage broker, KAG Financial, said mortgage rates could continue to fall even if the Bank of England hikes the base rate by 0.25%: “With SWAP rates reducing and the competition between lenders heating up, I believe we will continue to see rates fall even if Bank Rate goes up by 0.25%, which is great news for the market. As we saw following the last base rate increase, fixed rates actually went down.”

Riz Malik, director of Southend-on-Sea-based independent mortgage broker, R3 Mortgages, agreed that rates could continue to fall even if we see another increase in Bank Rate next week, but said the inflation print will be key: “Mortgage rates will continue to fall even with a 25 basis point increase at the next Monetary Policy Committee meeting as long as there are no nasty surprises in the inflation print. A 'hold' decision would really shake the market and result in some substantial cuts. Lenders are now desperately trying to compete on criteria as well as rates. After NASA's recent press conference, I wouldn't be surprised if lenders were planning to blast a Decision in Principle into space, they're that desperate for business.”

Justin Moy, founder at Chelmsford-based mortgage broker, EHF Mortgages, shared the view that lenders are desperate for business: “Even if the base rate were to increase by 0.25%, mortgage lenders would look to continue to make small cuts, if only to attract more applications. This is especially the case in the buy-to-let market, which currently has similar levels of life to Mars.”

Ross McMillan, owner at Glasgow-based Blue Fish Mortgage Solutions, also stressed the importance of the next inflation report: “Inflation remains the key measurement and as long as this maintains or improves on the downward trend seen last month, then confidence that we are over the peak of the rate mountain should gain momentum, regardless of whether the Bank of England opts to stamp their foot on the pedal one more time or not. That's when we are likely to see lenders put on their commando gear and really begin to fight for their share of a diminishing market. This should be good news for borrowers of all kinds as we head into 2024.”

Graham Taylor, managing director of Nailsworth-based independent mortgage broker, Hudson Rose, also said a 0.25% increase in Bank rate has already been baked into mortgage pricing "Lenders will most likely have already factored in a 0.25% increase in the base rate next week when pricing their current ranges, so I would not expect a massive change in fixed rates following a 25 basis point hike."

But for Peter Stamford, director of Alston-based Moor Mortgages, the rate increases announced in recent weeks have been little more than a PR pillow fight: “These past few weeks have been less of a mortgage rates war and more of a mortgage rate pillow fight, with each lender swinging their rate cut press releases but with little effect. A hold by the Bank of England next week, in conjunction with continuing falls in SWAP rates, will hopefully convince the banks to sneak some bricks into their pillowcases.”

Meanwhile, Gary Bush, financial adviser at the Potters Bar-based MortgageShop.com, went into the weekend praying for a pause at next week's MPC meeting: “We pray for a hold by the Bank of England on base rate rises, as this will allow the market to further settle and increase the likelihood of the rate price war among lenders continuing. It's now all about the inflation figure release. If that disappoints then we could see a reversal in some of the recent rate cuts and borrowers will be bellowing, Beam me up, Scotty.”

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17 responses from the Newspage community

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Andrew Montlake
Managing Director at Coreco
With mortgage lenders now battling for market share and wanting to make a stellar start to the new year, we can expect to see continued rate and criteria improvements over the next quarter. The return of the sub-5% 5-year residential fixed rate is now looking imminent. It looks like we are about to scale the peak of the recent interest rate cycle, with one more rate rise to 5.5% already hard-baked into mortgage pricing and having little impact on mortgage rates. Much now rests on the next inflation report, and we can only hope that the Monetary Policy Committee opts to pause, or at most raise by 0.25%, even if the inflation data is not quite what was expected, rather than unleashing more damage on the economy.
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Riz Malik
Independent Financial Adviser at R3 Wealth
Mortgage rates will continue to fall even with a 25 basis point increase at the next Monetary Policy Committee meeting as long as there are no nasty surprises in the inflation print. A 'hold' decision would really shake the market and result in some substantial cuts. Lenders are now desperately trying to compete on criteria as well as rates. After NASA's recent press conference, I wouldn't be surprised if lenders were planning to blast a Decision in Principle into space, they're that desperate for business.
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Ross McMillan
Owner/Mortgage Advisor at Blue Fish Mortgage Solutions
When SWAP rates were on the rise, lenders sent rates up like a rocket, but now that a drop in SWAP rates has started to gain momentum, the rate reductions have been more like a distinctly disappointing and slow-burning Roman candle. Saying that, any reductions, however minimal, are certainly better than none at all and the outlook heading into the final quarter of the year is feeling a little less daunting than some had predicted. Inflation remains the key measurement and as long as this maintains or improves on the downward trend seen last month, then confidence that we are over the peak of the rate mountain should gain momentum, regardless of whether the Bank of England opts to stamp their foot on the pedal one more time or not. That's when we are likely to see lenders put on their commando gear and really begin to fight and scrap for their share of a diminishing market. This should be good news for borrowers of all kinds as we head into 2024.
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Ranald Mitchell
Director at bad credit mortgage specialists Charwin Mortgages
It is likely the mortgage rate war will continue even with further increases in Bank of England base rate. Lenders are falling well short of their committed targets and will continue to knock each other down for market share. There appears to be a disconnect between base rate activity and mortgage pricing now so it remains to be seen whether there will be any influence should the base rate increase or remain the same. SWAP rates reducing helps with fixed rate pricing but there must be a sustained reduction before the mortgage market really benefits.
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Justin Moy
Managing Director at EHF Mortgages
It would be quite a statement if the Bank of England hold rates at their current level. Inflation is still more than 3 times the target, so it would suggest to the markets that Threadneedle Street believes inflation will continue to fall naturally. That would push SWAP rates lower, making fixed deals cheaper and may achieve the magic sub-5% 2-year fixed pricing by the end of 2023. Even if the base rate were to increase by 0.25%, mortgage lenders would look to continue to make small cuts, if only to attract more applications, especially in the buy-to-let market, which currently has similar levels of life to Mars. We need to keep an eye on inflation figures. We may not see much improvement this month, and the same figures in both the US and Europe suggest that we are not over the worst yet.
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Rohit Kohli
Director at The Mortgage Stop
A hold decision on rates will allow the market to continue to stabilise and we'll likely see further tweaks from lenders as competition continues to heat up. If we see rates go up again I don't believe it will have a material impact on lender rates as they are today but I do think it will put to bed further rate cuts from lenders for a few weeks. If next week's inflation report shows a further drop then I think it will be tough for the Bank of England to justify increasing rates without being labelled as one-dimensional. But if inflation is stagnant or worse than expected, it could force the hands of the Bank of England. Lenders want to lend so loss-leaders in the form of discount tracker rates could make a comeback in some meaningful way but with the continued uncertain economic outlook I don't think that we'll see fixed rate loss-leading products.
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Stephen Perkins
Managing Director at Yellow Brick Mortgages
The markets had priced in a further 0.25% increase for September, so a hold will likely lead to further rate reductions. Things looked positive following Andrew Bailey’s comments, but less so in light of the recent GDP figures. Now everyone awaits the crucial inflation data, which will hugely influence the decision of the Bank of England. We hope for the best but expect the figures to disappoint.
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Elliott Culley
Director at Switch Mortgage Finance
The market is expecting a 0.25 base rate increase so I believe SWAP rates will continue to fall even if this takes place next week. A hold could seriously impact the market but I think it's unlikely with the expected slightly higher inflation figure. SWAP rates have already dropped significantly this month and I am surprised lenders have continued to be cautious. Last time SWAPs were this low we had products starting with a 4. Most seem to be waiting for next week's inflation announcement. I think the mortgage market mercury could really start to rise next week.
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Kylie-Ann Gatecliffe
Director at KAG Financial
With SWAP rates reducing and the competition between lenders heating up, I believe we will continue to see rates fall even if Bank Rate goes up by 0.25%, which is great news for the market. As we saw following the last base rate increase, fixed rates actually went down.
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Graham Cox
Director at Bridging Hub
The most important factor affecting mortgage rates right now is the outlook for inflation. The data has improved over the past month or so, and swap rates, the price at which lenders fix their funding costs, have fallen, allowing them to cut mortgage rates. It's crucial the next set of inflation figures on Sept 20th doesn't disappoint, otherwise we could see lenders putting mortgage rates back up again.
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Gary Bush
Financial Adviser at MortgageShop.com
I think the mortgage fixed rate market has settled nicely on a downward trajectory. It seems lenders have remembered that they need to maintain market share. We pray for a hold by the Bank of England on base rate rises, as this will allow the market to further settle and increase the likelihood of the rate price war among lenders continuing. It's now all about the inflation figure release. If that disappoints then we could see a reversal in some of the recent rate cuts and borrowers will be bellowing, 'Beam Me up Scotty'.
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Graham Taylor
Managing Director at Hudson Rose
Lenders will most likely have already factored in a 0.25% increase in the base rate next week when pricing their current ranges, so I would not expect a massive change in fixed rates following a 25 basis point hike. Of course, if inflation data is less positive, this could alter things. Still, we have to remember that, as transaction levels have fallen, the one lever lenders can use to maintain market share is to lower rates to stimulate new business. It will be interesting to see what some of the significant players who operate a more deposit-based funding model do, and whether other smaller providers try to follow suit, at the expense of their profit margin.
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Peter Stamford
Mortgage Expert at Stamford Home Finance
These last few weeks have been less of a mortgage rates war and more of a mortgage rate pillow fight, with each lender swinging their rate cut press releases but with little effect. A hold by the Bank of England next week, in conjunction with continuing falls in SWAP rates, will hopefully convince the banks to sneak some bricks into their pillowcases.
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Rhys Schofield
Brand Director at Peak Mortgages and Protection
The boffins have already done a lot of work predicting what will happen with base rates and priced their offerings accordingly, so a 0.25% change is unlikely to alter new fixed rate pricing much. I'd favour keeping base rate the same and let the previous increases actually filter through, lest the Bank of England throws the baby out with the bathwater, especially seeing as inflation will likely continue to edge down. It just feels like everything needs to be left alone for a month or two.
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Luke Thompson
Director at PAB Wealth Management
I think if there is a hold in rates at the next meeting, fixed rates will continue to fall as most major lenders have already priced in further rate rises until the end of the year. I also therefore believe that if the base rate is increased then there is a good chance we won't see too much movement in the fixed rates being offered by lenders currently. The inflation report will be interesting, as the latest GDP data showed the impact of higher interest on the economy. It is starting to feel like we are either close to, or have hit, the tipping point where the economy will start to really slow down and inflation will continue to fall quickly. I think the big lenders will have struggled to hit their lending targets for this year and, with this in mind, they will be very aggressive with their pricing in the last quarter to at least claw some of this back.
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Gary Boakes
Director at Verve Financial
The headlines will focus on the likely base rate increase next week, but it's SWAp rates that truly matter to lenders and their downward direction over the past few weeks has seen lenders tweak and lower their rates where they can. They still need to make profits and maintain market share, and you get the feeling that they are trying to help stimulate a slowing market. With September and the lead-up to Christmas generally a busy time for purchasers, more good news hitting the headlines will certainly help boost buyers' confidence.
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Charles Breen
Founder at C B
I don’t believe holding the base rate will affect the rates offered to the consumer, at this point an increase has already been priced in and is more dictated by the mood of the market, hence the current repricing and decrease in rates. The biggest factor in dictating a change in swap rates will be key economic data such as the rate of inflation which is out next week. This will affect the markets confidence in Britain PLC and as a result the swap rates on offer to the lenders.
That said we are in the beginnings of what appears to be a rate war among lenders, as the market has contracted they are having to get more competitive, before they were pricing to deter being overwhelmed and now they are pricing to entice. So yes we are in a rates war and could soon see loss leader products just to capture market share.