Mortgages Expected to Remain Above 4% Despite Anticipated Rate Cuts
Experts caution that homeowners should not expect significant reductions in mortgage rates despite a forecasted cut to the base interest rate in the coming month.
Current trends in mortgage rates may not reflect impending cuts.
As inflation rates showed a surprising slow down to 2.5% in December from 2.6% in November, many may be wondering how this affects mortgage affordability. Economists had largely anticipated either a hold or a slight increase, making the recent inflation decrease a surprising development. Market traders are now betting on further cuts from the Bank of England, with many anticipating a 25 basis point cut to 4.5% in February.
However, analysts continue to express caution. “It is likely that rates on two-year and five-year fixed mortgages will remain broadly stable, albeit with slight increases in the most competitive deals as lenders adjust to market conditions,” stated Nick Mendes of brokers John Charcol. You’ll want to stay informed as mortgage rates are forecasted to increase in the near term, driven partly by rising swap rates related to fixed-rate mortgage pricing.
Recent adjustments have already begun, with Virgin Money increasing rates by 0.2 percentage points and Co-operative Bank raising fixed rates by 0.59 percentage points. This rollercoaster of fixed-rate increases will undoubtedly add pressure to Chancellor Rachel Reeves and the Labour government, who already face scrutiny over household financial burdens.
The Response from Economists
While some believe that a base rate cut could boost household disposable incomes, the consensus among many economists suggests otherwise. David Hollingworth from brokers L&C remarked, “There’s no room for cuts below 4% at the moment, and it’s currently more likely we will see more rates stabilise or even continue to edge slightly higher as the market adjusts to volatility.” The prevailing sentiment is that unless monetary policy shifts dramatically, aspiring homeowners should prepare for rates to hold above the 4% threshold.
In fact, the average two-year fixed-rate mortgage stands at 5.49%, and the average five-year deal sits at 5.27%. This further complicates efforts to improve real living standards by enhancing the disposable income of families, a target recently underscored by Keir Starmer’s administration.
Market Conditions and Predictions
The economic landscape is shifting, however, as some economists foresee multiple interest rate cuts throughout the year. Sanjay Raja, chief economist at Deutsche Bank, indicated that the Bank of England is likely to feel empowered to continue easing policies in February. He anticipates that rate cut expectations should ease following the latest inflation report.
However, even if the anticipated cut occurs, it might not provide immediate relief for mortgage rates. The influential market conditions, including government borrowing costs, remain of concern. Tomasz Wieladek of T. Rowe Price Group believes the Bank may reduce the rate four to five times this year, which is significantly more aggressive than current market pricing suggests.
Another element to consider is the unpredictability surrounding global events, particularly in light of the upcoming Trump presidency, which some economists believe may keep inflation expectations elevated. “While we expect the MPC to gradually cut rates in 2025, we believe the Bank will remain cautious, and rates may remain higher for longer,” remarks Monica George Michail from NIESR.
Global economic factors influencing the UK mortgage market.
Conclusion
Despite the positive trends signalled by decreased inflation, the picture for mortgage rates appears more complex. With persistent inflation and the potential for several rate cuts, it seems likely that homeowners will need to adapt to a new normal. Not only are rates expected to hold above 4%, but the prospect of future increases also looms large amid a volatile economic landscape. As the Bank of England navigates these challenges, homeowners and prospective buyers should stay alert for further updates and adjustments in the mortgage landscape moving forward.
For those managing mortgages amidst this uncertainty, now could be the time to consider professional advice, stay informed about market conditions, and prepare for what may be a more prolonged period of elevated rates than previously anticipated.
