What happens to mortgages if the base rate goes to 4.5%?

Existing fixed rate mortgage borrowers will see no immediate effect on their payments if the Bank of England base rate increases to 4.5%. Their payments will remain unchanged until the initial term of their fixed rate mortgage expires. For new fixed rate mortgage borrowers, the interest rate they are offered is influenced by the SWAP market, which has already factored in the potential increase in the Bank of England base rate to 4.5%. This increase could potentially establish a floor for mortgage rates, meaning that rates will likely hover around this level. However, it's important to note that SWAP rates are a forecast into the future and are subject to change. If the Bank of England is able to effectively control inflation, we may see rates at the higher end of 3% this year.

As we know, fixed-rate mortgages aren’t directly impacted by base rate rises, but swap rates, so increasing the base rate won’t have much impact, if any, on fixed rate mortgages. What we will see, though, is the direct impact on mortgages that are on standard variable rates or tracker products. I believe we’ll continue to see the competition on fixed-rate mortgages getting hotter and you never know, we may even see fixed-rates products lower than the Bank of England base rate, even if it’s for a short period of time, something we haven’t seen for 25 years.

The forward guidance from the Bank of England is for inflation and the base rate to start to fall in late 2023 / early 2024. As fixed rates are priced not just on today's interest rates, but the outlook for the future, most lenders have already factored in expected increases to the BoE base rate this year. If anything, as we get closer to late 2023 / early 2024 I expect fixed rates to ease slightly, as hopefully the recession and it's impact on financial products is not as pronounced and prolonged as was feared.

I expect fixed rates will continue to reduce as banks have anticipated the base rate to peak at 4.5% for a while.

If the base rate rises to 4.5% later this year, then that's going to have an impact on all the customers that have taken out tracker and discounted rates recently. They've been popular due to the difference between their fixed rate counterparts recently, but are open to movements alongside factors such as base rate rises. Whilst this may mean their monthly payments go up, they should be prepared for this and could well still be in a better position financially than if they'd taken a fixed rate.

If the base rate goes to 4.5%, then I expect the best mortgage rates to rise to around 5 per cent. I think some of the optimism that base rate rises won't affect lender rates is misplaced. Yes, mortgage rates have fallen in the past couple of months, but that's largely a reset after ramping mortgage rates excessively following the Liz Truss mini-budget debacle. I don't believe we'll see mortgage rates lower than the Bank of England base rate, which is what some mortgage brokers seem to believe.

Fixed rates will be laughing until they run out and variable/trackers will be considering a fixed option. Older landlords with big portfolios stuck on SVR with lenders like CHL should really consider their options at this point.

If the base rate does get to 4.5% the impact on mortgage rates will vary, depending on the type of mortgage. Fixed rates won't change, as their pricing is not directly linked to the base rate, likewise variable rate and discounted variable rate deals are not directly linked and individual lenders will choose how much of any increases they pass through on these deals. It is only tracker rates that are directly linked to the base rate, so these will rise as the base rate does. If you have an older deal, it may be worth reviewing it, as tracking at 2% over the Bank of England was great when the base rate was 0.5%, but not so great if it's at 4.5%.

Any increase in base rate this week over and above the widely expected 0.5% would be a further shock to a mortgage market still slowly recovering from last year's mini-budget. This could see lenders reverse recent cuts in fixed rates, possibly quite dramatically, and damage confidence in an already declining housing market. After the chaos of recent months, The Bank of England now has a firm duty to deliver boring predictability.

I'm not one to say lenders have inside information...but they always price accordingly ahead of Bank of England base rate announcements. BOE is forecast to go to 4% tomorrow, yet fixed rates continue to plummet. Notably, Virgin have today launched the first sub 4% fixed rate since the mini-budget debacle. With that in mind, even if the base rate does rise to 4.5%, I'd be fairly confident it will have zero effect on mortgage fixed rates. P.S. Swap rates.