Understanding the current market & what the future may hold for your mortgage
by Adam Tovey – Director | Independent Mortgage & Protection Adviser @ Prism Mortgage & Protection Advice
The UK mortgage market is moving in a positive direction.
In August, we saw the first decrease in the Bank of England Base Rate for over four years. Mortgage lenders broadly followed suit by reducing their rates following the announcement and they continue to compete against each other to attract you and your mortgage.
Let’s break down what’s happening, what’s expected, and how it could affect you as a homeowner or potential borrower.
Interest Rates: A pause before potential cuts?
The Bank of England (BoE) decided to hold interest rates in September at 5% – a decision that came as no surprise to many in the financial world. However, Andrew Bailey, Governor of the BoE, has signalled that the path forward may involve further rate cuts in the near future, potentially starting as early as November. This would follow a similar trend seen in other global economies, such as the U.S. and the Eurozone, where central banks have already begun reducing rates to support growth and reduce inflationary pressures.
Inflation and its impact on the cost of mortgages
The primary purpose of the Bank of England is to ensure the prices of the things we all need to buy remain at an affordable level. This ‘sustainable level’ is deemed to be 2% i.e. it is thought that petrol being 2% more expensive than it was exactly one year ago, is sustainable.
The Base Rate is the main tool that the Bank of England have in their toolkit to ensure their 2% inflationary target is sustained. How? The idea is:
- Bank of England increase the Base Rate
- Mortgage lenders and financial institutions broadly follow suit by increasing the rates on our financial products
- We all have less money in our pockets to buy things
- Manufacturers are forced to reduce prices
As of September, the rate of inflation fell to 1.7%, the first time it’s fallen below the BoE’s target since April 2021; This is a far cry from the 11% we saw in 2022. The gradual reduction of the rate of inflation over the last 12 months has given the BoE some breathing room, allowing them to reduce rates in August and consider further rate reductions.
Source: Office for National Statistics
One area to keep an eye on, however, is energy prices. Rising energy costs, starting in October, may push inflation slightly higher for the remainder of the year.
The BoE is balancing the need to keep inflation under control while also addressing the economy’s growth and cost-of-living concerns.
What does this mean for the mortgage market and your mortgage?
Financial markets are predicting at least one more rate reduction this year – many expect the BoE will reduce the base rate to 4.75%. This would come as welcome news for borrowers, as it should result in a further easing of mortgage rates and potential savings. Economists suggest that this gradual reduction in rates will continue well into 2025, offering some relief after years of rising interest rates. However, with inflation within target for the first time in over three years and energy prices expected to rise, the BoE will likely proceed with caution.
Conclusion
The market is in a good place after a challenging period with interest rates on a downward trajectory. For mortgage borrowers, this could mean potential savings in the future, particularly for those on variable-rate products or nearing the end of their fixed-term deals. That said, if the last two to three years should teach us anything, it is that things can change – and quickly. Interest rate changes depend on how the broader economy evolves, including inflationary trends and global matters that are beyond the control of our Government… pandemics, invasions, wars.
It is also worth noting that Andrew Bailey has explicitly said that we should not expect rates to fall to the hyper low levels that we all became used to following the financial crisis in 2007. We have been told that the long-term expectation is that rates settle somewhere close to those prior to that financial crash – which were not that far from the 4.75% mentioned above.
As always, it’s important to stay informed about market changes and to speak with your mortgage broker to explore the most cost-effective and suitable options for you. Whether you’re planning to remortgage, buy a new home, or simply want to stay updated on how the market is evolving, keeping an eye on the Bank of England’s next moves will be key.
Understanding market conditions is the first step toward making informed financial decisions that align with your long-term goals.
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