Falling mortgage rates

Fixed rates are predominantly based on swap rates, not the Bank of England base rate. Of course they will naturally fluctuate with the bank rate but they're not tied to it like a tracker rate is. Historically, the cheapest fixed rates will be somewhere in the region of 1% higher than the base rate and this is essentially the profit that lenders will make from those deals. With market confidence at an all-time low, business levels at an all time high, and the base rate on the up with no assurance as to when it is likely to stop, lenders have been increasing their fixed rates to cover themselves from many angles all year. These increases have essentially outrun the bank rate rises and as a result we were seeing as much as a 4% gap between the bank rate and fixed rates a couple of weeks ago. Lenders were also at breaking point with service levels earlier this year, and to deal with this they increased their rates. This left the next most competitive lender with an influx of business and naturally they increased their rates, too. This has happened all year and resulted in a cyclical situation of rate increases across the board. The reason they have started to decline and the gap is closing is also layered. The u-turn on the mini-Budget has restored some confidence in the markets, as has the exit of Truss and Kwasi. This in turn has reduced swap rates. Rate rises have curbed the flow of new applications, allowing lenders to sort out their service levels and can now offer a better turnaround time. They've all had such busy years they've probably hit their targets and haven't needed to be as competitive as usual but they now will have realised their pipelines are emptying and will eventually need filling again as there'll be new targets to hit in 2023. I imagine rates will be very unstable for the next 6 months until the bank rate peaks in 2023. A normal gap between the bank rate and fixed rates can then be restored. For now, I can't see fixed rates finding themselves much lower than high 4%'s so they have a little room to come down further over the coming weeks.

In September, there was a knee-jerk reaction in the money markets to the mini-Budget causing the pound to plummet and swap rates (the rate at which lenders can borrow money) to become inflated and very volatile. Since Rishi took over, the money markets have stabilised and the long term out look is very different. Confidence has been restored, despite the uncertainty that lies ahead. The Bank of England base rate does have an impact on the rates provided by lenders but it’s not the only factor and the forecast is looking more positive in terms of where that will be in the short and long term. So the reason that rates are now coming down is that there was a sudden increase in rates due to the shock of the mini-Budget but the UK economy and, crucially, markets' perception of it has stabilised again so those rates are coming down back in line with a more stable long term out look. This doesn’t mean they will come down to the levels we saw 6 months ago but happily I believe we’ll see a continued drop in interest rates into the new year.

Whilst headlines have been made about the latest increase of 0.75% being the largest base rate increase since ‘89, the reality is rates have fallen due to SWAPs that underpin the cost of fixed money reducing almost continually since mid October. 5-year SWAPs for example were trading at 5.478% back on October 12th, to which the lender would then apply their margin. 5-year SWAPs have since dropped to as low as 4.33% recently. This reduction has resulted in cheaper funding for lenders, and is why the markets have seen reductions this week from most major players such as NatWest, HSBC, Accord, Halifax, Virgin, Platform, Coventry and Barclays. Only those on Base Rate Trackers and potentially discounted variable rates will have seen an increase once it has been passed on by their lenders. As the mortgage market slows, lenders are now clearing their ready-to-pop pipelines, which has allowed them to reduce waiting times on processing meaning they are now in a stronger position to increase service and improve on rate. We expect more reductions to follow so long as SWAPs remain on a downward trend, and pipelines continue to clear. The lower cost of borrowing, reducing pipelines of business and an increase in competition should result in rates continuing to drop marginally and has placed the market in its best position since mid September. The fact that fixed rates are coming down at a time that Bank Rate is rising, can be a bit of a head scratcher, but it's all due to the fact interest rates are likely to peak at a lower rate than markets thoughts a few weeks ago.

The bank of England base rate has become so detached from the retail rates that it's recent 0.75% rise still did not take the now 3% base rate anywhere near the retail offerings. Swap rates have started to fall with some confidence returning with the governments fiscal policy, and the autumn statement should further instil some fiscal confidence. Swap rates are much more relevant to what we will see in the retail market than the bank of England base rate. As such, lenders have become more competitive with their offerings. For borrowers who secured a mortgage offer with a long expiry- maybe in panic, or as a hedge, they should now reassess their position, and look at whether savings can be made. This should be an ongoing process until there is the need for a completion to occur as either an offer is expiring, or their current rate is ending. I suspect as we enter 2023, and lenders face an annual lending target ahead of them, in the most challenging market for over a decade, that rates will continue to close the gap between the base rate and the retail offering.

Many banks originally forecasted that the base rate would increase dramatically more than it has, paired with a less bleak outlook heading into 2023 has seen a revision of where the base rate may end up reaching. Because of this many lenders are now looking to reprice accordingly. There a likely two reasons why they have been slow to reduce these despite tumbling Gilts and Swap rates. Firstly a big issue is service levels, when the panic first unfolded after the mini-budget announcement it lead to a number of lenders being swamped with applications. Which in turn has created a huge backlog and extensive delays. As the market quiets down they can then slowly look to reduce rates accordingly to attract business. The other reason for delays is 2022 has been an extremely busy year for mortgages and many banks will likely be well over target for this year and less inclined to be competitively priced. Heading into early 2023 when every bank is back at zero again, with a new target to reach to appease shareholders this could ignite rates to fall quicker.

This was fully expected after the latest change in the PM and Chancellor. Before that, the markets and the swap rates had driven mortgage rates to be 6% plus. However, the market has calmed down and the expected swap rates have decreased. Therefore, this has led to many mortgage products being overpriced. That is why we have seen many lenders decrease their rates in the past week, despite the latest Bank of England base rate hike.

Gilt yields and swap rates have fallen since Jeremy Hunt became Chancellor. Which has allowed lenders to reduce mortgage rates a little, despite the recent Bank of England base rate increase to 3 per cent. The next base rate hike is expected in December, and it's likely lenders will then resume the normal practice of passing on the entire increase. Possibly with an extra increase on top if the noises out of Threadneedle street are of more interest rate pain to come.

Mortgage rates are falling, it is expected after the mad panic last month where rates went up at an astonishing level. With swap rates reducing and the new government, I would expect the rates to come down even further.

The recent 0.75% base rate rise was already priced in to the fixed rates we saw in excess of 6%. Lenders have quickly concluded that borrowers are largely not prepared to take out mortgages which are priced so high and I expect them to take heed of this and continue to reduce their fixed rates in the run-up to Christmas. Banks make money by lending it out and once they have got their service levels back where they need to be in the next couple of weeks they will begin to price more competitively, even if that is at the expense of margin.

Simply put the reason fixed rates have fallen since the raising of the Bank Of England Base rate is because fixed rates are not directly linked to this. Of course the base rate has an influence on the price of mortgages, but fixed rates in particular are more closely linked to the Swap Rate market and it is these rates (The rate that lenders buy in fixed rate money) that have fallen in the last week to 10 days. Subject to a semi competent delivery of the fiscal plan by the new chancellor i would expect these to continue to fall before settling. However in order for these savings to be passed on to the consumer, lenders now need to address their service shortfalls. In truth fixed rates are still artificially high due to lenders using them to control the flow of business due to pressure on processing - the backlogs built up from the demand for mortgages in recent months have not been cleared and it is this fact alone that is slowing the reduction of fixed rate pricing.

They are falling due to a correction in the market based on the knee jerk reaction that saw the rates increase so significantly and quickly previously. The stability that the change of PM brought and the prediction that measures to reduce inflation will do the job all mean that the markets have settled. This also means that the swap rates for buying and selling from the money markets have also settled and this (along with a competitive banking market) is why we are seeing rates reduce. Rates will reduce slowly because no lender wants to stick their heads too high above the parapet with an excellent rate because all that will happen then is that they will get inundated with applications and their service levels will fall off a cliff and they will get unhappy brokers, customers and staff. So they all tend to wait and see what everyone else is doing and slowly move downwards in line with the other lenders that they are competing with.

The trend is your friend and mortgage rates have been falling fast this week with several major lenders cutting fixed rates by as much as 0.75%. With Gilt yields broadly back at pre mini-Budget levels and mortgage rates still stubbornly higher, there could be further falls to come before the year is out.

Rates have dropped despite the base rate rise last week because Andrew Bailey clearly indicated that he felt market predictions for a base rate peak of 5.5 – 5.75% were probably overly hawkish in light of the economic headwinds the UK is facing. As a result, swap rates – which price in base rate peaks over a given period and generally determine the price of fixed rate mortgages over that period - have been steadily dropping to reflect the downward adjustment to base rate peak forecasts. Rates are likely to continue to fall. Swaps are still on a downward trend and this should translate into cheaper fixed rate mortgages in the coming weeks. The smart money would suggest that the Autumn statement is likely to sustain this trajectory given that it is expected to provide a rather gloomy outlook for the UK economy over the next year to 18 months however, the floor on rates will be very much higher than where it was 12 months ago. The days of sub 2% fixed rate mortgages are long gone. Gilts yields are just one factor that affect swaps rates so whilst they are a very good indicator of the direction of fixed rate money costs, they do not affect rates directly.