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Cooling inflation will heat up the mortgage rate war

ended 14. November 2023

Ahead of Wednesday's CPI data, mortgage brokers have said that if inflation cools materially, the mortgage rate war will become even more fierce as lenders compete for business after a quiet year of purchase activity.

Gary Bush, director at the Potters Bar-based broker, MortgageShop.com said: “Any notable drop in inflation will continue to drive the fixed rate price war currently raging between lenders, and hopefully across all loan-to-values not just the high equity or deposit loans, as has been happening of late.”

According to John Choong, senior equity research analyst at Investing Reviews: “Cooling inflation will heat up the mortgage rate war. If inflation somehow manages to cool to the 5.6% the Bank of England is expecting, or miraculously even lower, borrowers will have a field day.”

Ranald Mitchell, director at Norwich-based independent mortgage broker, Charwin Private Clients, agreed: “Inflation falling will have a positive impact on the mortgage market, and if it falls further than expected then we will likely see wholesale downward repricing. Over the past two months or so, we've had tit-for-tat, slow and tentative rate cuts but lower-than-expected inflation could see lenders take off the gloves. Hopefully, positive inflation data will filter through to the repricing of higher loan-to-value products to stimulate first-time buyers and home movers into action.”

Much the same conclusion was drawn by Stephen Perkins, managing director at Norwich-based Yellow Brick Mortgages, who said: "Falling inflation will give much-needed respite to the mortgage market and potentially give borrowers a major boost, as lenders further reduce fixed rates based on an enhanced medium-term outlook."

Rob Gill, managing director at London-based broker, Altura Mortgage Finance, was also upbeat: “Mortgage lenders are already fully engaged in a mortgage price war as they compete to make up business in what’s been a quiet year, so further falls in inflation will only accelerate this trend. If inflation cools materially, more rate cuts into the New Year and beyond will be very much on the cards.”

But Craig Fish, director at London-based broker, Lodestone Mortgages & Protection, said it could be the New Year before rates start coming down in earnest: “I sincerely hope the Bank of England's predictions aren't wrong and that inflation does drop as expected. Equally, I think that caution will continue to be the keyword in the markets and don't expect any significant reductions in swap rates or mortgage rates until the New Year, when we might start to see some more aggressive pricing from lenders in a bid to start 2024 on a strong footing.”

Rohit Kohli, director at The Mortgage Stop, also sounded a note of caution: "Inflation falling below 5% will be great news in the short term but let's not forget that this is just reflecting the drop in energy prices now coming through the system. Wages are still rising significantly above inflation rates and with uncertainty across the world and energy prices on the rise again, it would not be surprising to see inflation go back up again in the coming months. While we'll continue to see interest rates stay competitive, we are nowhere near the Bank of England considering any base rate reductions."

Justin Moy, managing director at EHF Mortgages, agreed with Kohli that the base rate is not likely to be cut anytime soon: “Mortgage rates will continue to slip towards more palatable levels over the next 12-18 months, rather than see seismic rate cuts in the immediate future. While inflation does look to be falling quickly, that can easily be reversed by fuel inflation that is still on the horizon, hence why the base rate will stay at 5.25% for another six months or so. Caution is required but improvements in mortgage pricing are increasingly evident.”

Alastair Hoyne, CEO at Finanze, what the market really needs is stability: “We've already seen lenders reduce rates across the board, which is welcome news for borrowers, especially those coming off very low fixed-rate deals and facing a huge hike in payments. An early Christmas bonus with lower rates will always be welcome, but we need to avoid knee-jerk reactions to headline CPI figures. The lending market needs stability. Consumers need confidence in what's around the corner. If rates do start coming down, it should be on the basis that reductions are sustainable for the longer term and don't head back up again due to cutting too soon.”

But for Bob Singh, founder at Uxbridge-based Chess Mortgages, rates may need to start with a three if the wheels of the property market are really to start turning again: “Rate competition between lenders will intensify if Wednesday's inflation figures fall as much as expected. With 2- and 5-year fixed rates already breaching the 5% mark, this will only translate into lower interest rates going forward. But in a market starved of activity and with consumers lacking confidence, 4% could be the real barrier for lenders to break to attract borrowers in earnest.”

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14 responses from the Newspage community

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Bob Singh
Founder at Chess Mortgages
Rate competition between lenders will intensify if Wednesday's inflation figures fall as much as expected. With 2- and 5-year fixed rates already breaching the 5% mark, this will only translate into lower interest rates going forward. But in a market starved of activity and with consumers lacking confidence, 4% could be the real barrier for lenders to break to attract borrowers in earnest.
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Ranald Mitchell
Director at bad credit mortgage specialists Charwin Mortgages
Inflation is widely expected to drop, signalling an economic cooldown on many fronts. Inflation falling will have a positive impact on the mortgage market, and if it falls further than expected then we will likely see wholesale downward repricing. Over the past two months or so, we've had tit-for-tat, slow and tentative rate cuts but lower than expected inflation could see lenders take off the gloves. Hopefully, positive inflation data will filter through to the repricing of higher loan-to-value products to stimulate first-time buyers and home movers into action.
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John Choong
Senior Equity Research Analyst at Investing Reviews
Cooling inflation will heat up the mortgage rate war. If inflation somehow manages to cool to the 5.6% the Bank of England is expecting, or miraculously even lower, borrowers will have a field day. But considering the stickiness that continues to persist with services inflation, Threadneedle Street could be setting the bar too high for Wednesday’s data release.
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Stephen Perkins
Managing Director at Yellow Brick Mortgages
It would be fantastic to see inflation drop sharply as experts are predicting. Falling inflation will give much-needed respite to the mortgage market and potentially give borrowers a major boost, as lenders further reduce fixed rates based on an enhanced medium-term outlook. No doubt the Bank of England and the government will be out in force to take credit for any drop despite previously quoting all the external factors as to why inflation had not reduced significantly prior to this.
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Justin Moy
Managing Director at EHF Mortgages
Mortgage rates will continue to slip towards more palatable levels over the next 12-18 months, rather than see seismic rate cuts in the immediate future. While inflation does look to be falling quickly, that can easily be reversed by fuel inflation that is still on the horizon, hence why the base rate will stay at 5.25% for another six months or so. Caution is required but improvements in mortgage pricing are increasingly evident.
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Craig Fish
Director at Lodestone Mortgages
I sincerely hope the Bank of England's predictions aren't wrong and that inflation does drop as expected. Equally, I think that caution will continue to be the keyword in the markets and don't expect any significant reductions in swap rates or mortgage rates until the New Year, when we might start to see some more aggressive pricing from lenders in a bid to start 2024 on a strong footing.
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Rohit Kohli
Director at The Mortgage Stop
Inflation falling below 5% will be great news in the short term but let's not forget that this is just reflecting the drop in energy prices now coming through the system. Wages are still rising significantly above inflation rates and with uncertainty across the world and energy prices on the rise again, it would not be surprising to see inflation go back up again in the coming months. Inflation dropping sharply will give the Government the celebratory headlines that it wants but I think lenders and businesses are taking a more realistic approach. While we'll continue to see interest rates stay "competitive", we are nowhere near the Bank of England considering any base rate reductions.
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Elliott Culley
Director at Switch Mortgage Finance
Inflation reducing will only have a positive effect on the mortgage market. It will show the base rate hikes are doing their job and there will be less calls to raise Bank Rate in the future. It will also become harder for the Bank of England to continue their strong stance on the base rate staying higher for longer if the economy continues to tank.
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Steven Hargreaves
Mortgage and Protection Adviser at The Mortgage Co
Though it would send a very positive message to the housing market if the Bank of England base rate reduced to 5%, if it was done too early and rates have to increase again, the yo-yo base rate could affect confidence, meaning the Swap Rates could start increasing again, which would have a very negative effect on the housing market. The housing market is traditionally very quiet the last six weeks of the year, therefore would it be worth taking the time to stabilise rates rather than drop too early. Either way it's a huge call. Lenders have had it good for a long time, so maybe having to cut their margins is their penance. Hopefully they will realise that while cutting 60% loan-to-value products grabs the headlines, it does not help first-time buyers get onto the ladder. They need to cut margins on higher loan-to-value products to truly get the housing market moving.
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Graham Cox
Director at Bridging Hub
A large fall in this month's inflation figures has been signposted by the Bank of England. So unless they beat expectations, I don't expect mortgage rates to fall significantly. But rates are slowly drifting lower anyway, so we might see most mortgage products below 5% by early next year.
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Gary Boakes
Director at Verve Financial
A significant drop in inflation will certainly give a boost to the ailing property market. However, to expect the base rate to drop in the near term would be a bit premature, as the Bank of England has already hinted that drops will not be likely until the middle of next year. However, what we will see is a positive reaction in swap rates and more small reductions in mortgage rates. But with lenders having their eyes on their back books, there will be no major reductions anytime soon.
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Rob Gill
Managing Director at Altura Mortgage Finance
Mortgage lenders are already fully engaged in a mortgage price war as they compete to make up business in what’s been a quiet year, so further falls in inflation will only accelerate this trend. If inflation cools materially, more rate cuts into the New Year and beyond will be very much on the cards.
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Gary Bush
Financial Adviser at MortgageShop.com
Any notable drop in inflation will continue to drive the fixed rate price war currently raging between lenders, and hopefully across all loan-to-values not just the high equity or deposit loans, as has been happening of late.
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Alastair Hoyne
CEO, Finanze Capital at Finanze Capital
We've already seen lenders reduce rates across the board. It is welcome news for borrowers, especially those coming off very low fixed-rate deals and facing a huge hike in payments. An early Christmas bonus with lower rates will always be welcome, but we need to avoid knee-jerk reactions to headline CPI figures. The lending market needs stability. Consumers need confidence in what's around the corner. If rates do start coming down, it should be on the basis that reductions are sustainable for the longer term and don't head back up again due to cutting too soon.