Outlook on Interest Rates and Affordability

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UK Mortgage Trends: Interest Rate Outlook and Affordability

UK mortgage trends show that while affordability in the mortgage market may not have improved significantly, there is growing optimism regarding future interest rates. The Bank of England had been expected to reduce interest rates alongside decreasing inflation. However, various factors have influenced the Monetary Policy Commission (MPC) to maintain the rate at 5.25%.

MPC’s Decision and Public Reaction

The MPC’s decision has faced substantial criticism, particularly from those who believe the Bank should have lowered rates this month. A rate cut would have offered relief to small businesses and mortgage holders struggling with current affordability levels.

Despite this, numerous analysts remain hopeful that a rate cut might occur in the summer, with August being predicted as the likely month for the MPC to vote for a reduction. This expectation hinges on continued positive developments in inflation and other economic indicators.

Impact on Mortgage Rates: UK Mortgage Trends

The interest rates set by the Bank of England significantly influence the rates lenders offer for mortgages. Although the interest rate has stayed at 5.25%, the mortgage market has seen some fluctuations.

Changes in Mortgage Rates

According to data from Moneyfactscompare, the average two-year fixed mortgage rate decreased from 6.04% to 5.93% since early December 2023. Similarly, the average five-year fixed rate has dropped from 5.65% to 5.50% during the same period. However, both these product terms have experienced a slight increase in the past month. On the other hand, ten-year fixed rates have risen from 5.96% to 6.03% since December 2023. Rachel Springall from Moneyfacts attributes this to volatile swap rates, which have a distinct impact from the Bank of England’s base rate.

Springall comments, “The rising cost of mortgages is a deep concern for borrowers. This is especially true for those about to transition from a fixed rate deal and need to refinance.” Affordability is a critical issue for both homeowners looking to refinance and new buyers. Consequently, those finding it hard to manage mortgage repayments will be keenly awaiting a reduction in interest rates. Homeowners unsure whether to secure a new fixed rate mortgage might still find it more cost-effective than switching to a Standard Variable Rate (SVR), which currently exceeds 8%. This rate has nearly doubled since the Bank of England began increasing the base rate in December 2021.”

Springall adds, “A typical mortgage with the current average SVR of 8.18% would cost £287 more per month compared to a typical two-year fixed rate (5.93%).”

Anticipated Rate Reduction in August

Many experts predict that the Bank of England’s eventual decision to lower interest rates will rejuvenate the market, prompting lenders to reduce their mortgage rates accordingly. August is widely anticipated as the month when this might happen.

Data-Driven Decisions

Some speculate that the Bank might be waiting until after the general election to make any changes. However, Daniel Mahoney, UK economist at Handelsbanken, argues against this view. He asserts, “The MPC has been very clear that their decisions are data-driven. Given that several rate-setters were close to joining the two members supporting rate cuts, the minutes of June’s MPC meeting suggest that a rate cut in August is still likely. We believe August will mark the beginning of the rate-cutting cycle, provided the upcoming labour market and inflation data do not present any surprises.”

Election Considerations

Conversely, John Fraser-Tucker, Head of Mortgages at Mojo Mortgages, believes the Bank might indeed be waiting until after the general election to adjust interest rates. He contends that the winning party’s housing policy will significantly influence the decision.

Fraser-Tucker explains, “Despite May’s inflation hitting 2%, the Bank of England holds the base rate at 5.25% before the July 4th General Election.” Typically neutral during elections, the Bank avoids perceived political interference by maintaining rates. The elected government’s housing policies could sway future rate decisions. Labour’s manifesto prioritises first-time buyers, aiming to make the mortgage guarantee scheme permanent as ‘Freedom to Buy’ and assist 80,000 young homebuyers in five years. Conversely, the Conservatives propose measures to cut mortgage costs. With these varied strategies, the Bank delays rate adjustments until after the election to mitigate market uncertainty.”

Conclusion: UK Mortgage Trends

In summary, while the affordability of mortgages has not seen the desired improvement, there is cautious optimism. Many anticipate a potential reduction in interest rates in the near future. The Bank of England’s decision to maintain the rate at 5.25% has sparked debate, with differing views on whether a cut should have occurred this month. However, many experts anticipate that August might be the turning point, provided that inflation and other economic indicators remain favourable. Homeowners and prospective buyers alike are keeping a close eye on developments. They hope for a break in the challenging affordability landscape.

Find out more about what’s happening in the property market in our News column.

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