iNews mortgage article

The Bank of England's biggest rate rise in 33 years of 0.75% did not push up fixed-rate mortgage costs in November because deals had already been "overpriced" in the wake of Liz Truss's chaotic mini-Budget. Lenders had already factored a gargantuan "Truss Premium" into their fixed-rate prices, and as a result the Bank of England's interest rate decision made little to no difference to homebuyers. In what can be a head scratcher for many borrowers, we are seeing mortgage rates actually decrease despite the recent rate hike and more hikes to come, as a few weeks ago lenders were factoring in a 6% base rate by May 2023. However, the markets have now calmed and we are looking at a base rate of circa 5% by May 2023. We expect the base rate to peak around 5%-5.25% in May 2023 and lender product rates to peak around 7%-10% on standard residential mortgages.

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 past 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. The minutes of the MPC Meeting show that it is now expected that Bank of England Base Rate will peak at not more than 4.5%, with a lot of economists seeing this figure at 4% or lower. Rates will then settle for a period of time, of course dependent upon global events and factors further affecting the UK economy.

The simple fact is that lenders baked in expected base rate rises as well as a plummeting pound off of the back of the autumn statement into their prices. The pound is no-longer in a tailspin and the guidance from the Bank of England is that rate rises are unlikely to be as large as some had feared. Lenders are in better control of administering their application volumes so can afford to be punchier with their pricing and we've generally seen downwards movement over the past few weeks.

Fixed rate mortgages are priced off something called swap rates, rather than the base rate, which are a financial market mechanism that is effectively trying to predict the path of base rate. Swap rates are coming down, and so fixed rates are coming down, too, which is a sign that base rate is not looking like it will need to rise as much as markets first predicted, i.e. the reversal of the unfunded tax-cuts from the previous administration's mini-Budget, means that markets have settled and so less dramatic intervention from the Bank of England is seen as being required.

This was predicted. Fixed rates are not generally funded by Bank of England Base Rate, with the money being borrowed from other institutions using a pricing mechanism referred to as "swap rates". These swap rates reflect the sentiment of the financial markets and there was concern over the UK economy. Since the new Prime Minister has been appointed the sentiment has improved and therefore these swap rates have reduced. This is not the only factor, lenders have also starting to make headway through the sudden increase of business that was prompted by hard and fast rate rises. This meant they were swamped and didn't want to look competitive and gain more business, so, they raised their rates. This started a chain reaction, with no one lender wanting to be exposed as "best value" for too long. Add to this that we are nearly at year end and many lenders' new business targets will be reset to zero, which means we are likely to see some further reductions in fixed rates in the coming few months, even if base rate is increased further. All bets are off past January. In this market it is impossible to see through the smoke beyond that as there are many wolves lurking in the shadows.

The mini-budget spooked lenders, as gilt and swap rates soared. It suddenly became much more expensive for lenders to get fixed rate financing, and they passed this on to customers. The difference between the base rate and average mortgage rates increased 3.5-4%. Now that money markets have calmed down, lenders are pricing their deals more sensibly, even with the recent base rate hike to 3 per cent. How high rates go is anyone's guess. Andrew Bailey seems to be banking on the base rate not rising much above 4 per cent. But that's dependent on inflation starting to fall in the next few months, which is by no means guaranteed. Particularly with the NHS and other public sector workers going on strike for higher wage deals.

The Bank of England base rate has become so detached from retail mortgage rates that its recent 0.75% rise still did not take the now 3% base rate anywhere near the retail offerings. Swap rates have started to fall after some confidence had returned in relation to the government's 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 their 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 offerings.

It’s great to be able to get the message out there that fixed mortgage rates have been falling despite the Bank of England continuing to raise the base rate. When we saw fixed rates spike from the high 4’s to the mid 6’s, this was to do with the lack of confidence in the Truss administration and the the recent base rate rise of 0.75% was “priced in” to that. Lenders are very well-funded and are very keen to give out lots of mortgages in 2023 and they know full well rates of over 6% will be putting borrowers off so I’m fully expecting them to continue cutting rates to attract new borrowers in the coming weeks.

Mortgage rates are falling, and 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.

This is 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.

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. I think the base rate is predicted to hit 4-5% at it's peak, I believe it is more likely to be around 4% now than 5% and the Autumn statement should have little effect on them as we have a much more measured approach from Government now towards money and stabilising the economy.

SONIA swap rates are falling which is good news for borrowers as fixed rate deals are determined by the swap rates not Bank of England base rate. Swap rates are an agreement between two parties where they agree to exchange one stream of future interest payments for another, based on a specified principal amount. They are used by mortgage lenders to mitigate the interest rate risk in a fixed rate mortgage. One party agrees to receive a fixed-rate payment, while the other receives a variable payment. During the course of the week many lenders have reduced their rates. As the season of goodwill is fast approaching I expect many lenders to further reduce their rates in the coming weeks.