Impact of a base rate rise on mortgage rates

Next Thursday, the bank is likely going to raise the basic rate, but it won't negatively affect the fixed interest rates that we get from lenders. They will probably continue to reduce. This is because the rates that lenders use to set their fixed rates, called swap rates, are also expected maintain or reduced. The market is ready for these changes and if nothing unexpected happens, we don't think the cost of mortgages to increase. This does not mean people who want to buy a house or refinance their current mortgage won't see much difference. The Lenders Fixed Rates are significantly higher than before the Truss Government.

Whilst I haven't yet learned to read a crystal ball, my gut tells me that this will probably make little difference to mortgage rates. We're in a different world now compared to September when everyone thought rates would peak higher than what now looks likely and we're seeing terms like 'rate wars' in the headlines again as lenders aggressively cut rates to win business.

The market is prepared for increases in the Bank of England's base rate this year, it's not going to be a surprise when it rises, so I don't foresee any huge shift in mortgage pricing as long as the increase is within the expected range. Financial markets are generally fairly stable, but they don't like surprises. So, as long as there's no unexpected news then we shouldn't see any huge reaction in mortgage rates.

Since the latter part of 2022 we have seen a significant uplift in positive activity between lenders, with weekly reductions in their interest rates. This has continued into 2023, with an increase in the Bank of England base rate already anticipated. Lenders make decisions for their rates on numerous factors, including sentiment and confidence. The base rate does have an impact, but predominantly in the reasons for the increase, rather than the increase itself. Inflation has been dropping, albeit slowly, and is expected to continue alongside a backdrop of healthy demand for property and lending from the start of this year, in stark contrast to Q4 of 2022. This confidence, flexibility, and increased competition between lenders should mean rates will not be negatively affected by the BoE decision.

We still need to see some adjustment in shorter-term fixed rates on mortgages. 5 year fixed rates are still, in many instances, lower than 2 year and is a sign of where the market believes the future will be. The environment appears to be returning to "normal" so we are likely to see 2 year pricing reduce further, even if base rate does rise by 0.5%. It is my guess that we are getting close to where the new normal will sit, although it is likely to be slightly volatile for a while. Unless, of course, another megalomaniac decides to invade a neighbour, the zombie apocalypse begins, aliens arrive or another unforeseen event arises.

With the expected base rate rise, I don't see any change in mortgage rates, they are all reducing. I expect this to continue unless there is a shock with a significant base rate increase.

Naturally, people will see the base rate go up and panic that fixed-rate mortgages will increase. The reality is that even if further base rate rises continue we are still likely to see the pricing of fixed-rate mortgages reduced. As it is far more important to look at the pricing of the gilt and swap market to indicate where fixed-rate mortgages will end up.

Mortgage rates will likely rise if there's a 0.5% base rate hike or higher. Although fixes have been falling in recent months and lenders took December's base rate increase in their stride, they had more wiggle room to do so then.

Now with fixes for the best customers falling to 4-4.5%, there's not much margin for lenders if, as expected, the base rate reaches 4 per cent. My best guess is fixed-rate mortgages will increase by 0.25-0.4% next month.

I anticipate fixed rates to be competitive over the next few months as lenders jostle with each other for business.

I would be very surprised if they opt to increase the 'fixed' rates if the BoE vote to increase the base rate at their next meeting as they are priced in correlation to the SONIA (Sterling Over Night Indexed Average) swap rate. SONIA is based on actual transactions and reflects the average of the interest rates that banks pay to borrow sterling overnight from other financial institutions and other institutional investors.

As I write this I have a notification from another lender reducing rates, this time by up to 1.8%!!!

In my opinion, with new lending targets since the start of the year from banks and building societies, along with a slightly reduced demand, this has meant a mini price war has been taking place.

It’s likely the Base rate will increase further, however I don’t think this will mean an increase in fixed rates, in fact, I think there is room for these to fall further.

Hope this helps - good luck with the article Frances!!

The current path for Bank of England base rate is very much priced into mortgage rates already. Indeed, as lender competition intensives to win market share in a contracting market, the pressure on mortgage rates remains downwards, despite any increase in base rate this month.

The widely anticipated 0.5% rate rise has largely already been accounted for in the pricing of fixed rate mortgages, so as and when Bank Base rate increases, there is likely to be little change to mortgage rates Thereafter, all eyes will be on future inflation and how fast and deep the recession is. This will determine how quickly the Bank of England can cut rates and how quickly fixed rates thereafter can fall.

Swap rates look to be stabilising, this means that fixed rates should be good for a while longer. The base rate rise will affect those on trackers and some discounted rates, these people need to consider if it's best to get a fixed rate now. Also affected will be the mortgage prisoners with mortgages already outweighing the cost-effectiveness of keeping the property. If they are unable to change, they will also have their payments increased. There are exit routes for mortgage prisoners, but they are not well advertised and knowledge of them is low.