The Bumpy Road to Mortgage Stability
The impact of the Bank of England’s Monetary Policy Committee (MPC) base-rate decisions on mortgage pricing is not as immediate as it once was. This is due to a circle of influences that have changed the way lenders and borrowers interact with interest rates.
A Changing Landscape
Previously, more UK consumers had residential mortgages, mainly variable rate. So, when the MPC increased the base rate, households felt it immediately. However, today, with the higher cost of borrowing, fewer people have mortgages; of those, two-thirds have wisely opted for a fixed-rate mortgage over a number of years rather than a variable mortgage that can change monthly.
The impact of base-rate decisions on mortgage pricing is not as immediate as it once was
As a result, there are fewer people affected by base-rate changes and with less immediacy. Therefore, at a time of high inflation such as now, when the Bank increases interest rates in an effort to curb consumer spending and reduce inflation, it doesn’t work as quickly as it used to.
Global Influences
The success of our economy rests heavily on the monetary policies and politics of other countries; and, sadly, on global conflicts. Mortgage lenders are paying attention to global market sentiment, US monetary policy, inflation rates, and, ultimately, swap rates.
The influence of US markets on the UK economy is unquestionable
The influence of US markets on the UK economy is unquestionable; made evident when you compare the UK FTSE 100 to the US S&P 500 between December 1999 and December 2021. Their index values were steadily intertwined until around 2013, when the S&P 500 began an impressive trajectory towards a value 300% higher than that of the FTSE 100.
A Defining Year for Democracy
This year is being described as the largest election year in history. Around half the world’s population, living in more than 60 countries, is holding national elections in 2024. That’s around two billion eligible voters, so this could be a defining year for democracy, which will certainly affect market sentiment.
A defining year for democracy
The Impact on Mortgage Pricing
Ultimately, it is the price of swap rates that determines many lenders’ margins, which is why they are key to lenders’ decision making on mortgage pricing. If and when swap rates rise, lenders’ pricing of products will usually transfer that cost to mortgage products, rather than lenders narrowing their own margins.
The impact of swap rates on mortgage pricing
Hence the recent stream of mortgage rate hikes, despite UK inflation continuing its downward trajectory to 3.4% in April. At the time of writing, that is the lowest rate of inflation since 2021, and it is 0.2 percentage points lower than the 3.6% rate that economists had predicted.
Conclusion
At this stage, all we can really predict for the rest of 2024 is unpredictability. However, there is general optimism that we’re on the right road, however frustratingly bumpy it may be.
The future of mortgages
