Are mortgage rates coming down?

Fixed rates have fallen, while variable mortgages are still getting more expensive.

More than 1.4 million households are facing higher monthly mortgage repayments when they renew their fixed rate deals this year, according to the Office for National Statistics (ONS).

Most of these borrowers currently pay less than 2% interest after fixing their mortgages during the ultra-low interest rate environment of the pandemic. This means when they come up for renewal, they could see their rate more than double.

ONS data also predicted that most of these terms will be coming to an end in the current quarter, from April to June.

Deciding your next move is important. You could lock into a fixed rate now, but there’s always the chance that you could have got a better rate if you held your nerve that little bit longer.

Below, we’ve used Moneyfacts data to analyse the performance of fixed and variable rates. While explaining what factors are considered when pricing these mortgages, we’ve also outlined how these prices could trend in the future.

September 2022 was a significant month for the mortgage market.

After Liz Truss became Prime Minister, her Government’s fiscal event announced the largest set of tax cuts in over 50 years. This announcement was also known as the mini-Budget, which Paul Johnson, Director at the Institute for Fiscal Studies (IFS), said was “anything but mini”.

“The plan seems to be to borrow large sums at increasingly expensive rates, put Government debt on an unsustainable rising path, and hope that we get better growth,” he said at the time.

The IFS, a think tank, also said that this meant the UK would be carrying a tax burden into the following year, its largest since the 1950s.

So, how did a series of proposed tax cuts affect the price of mortgages?

In response to the mini-Budget, investors began moving their money out of UK bonds or gilts. Many of these investors considered the tax cuts to be unfunded, and therefore sought a safer environment for their investments.

This sell-off weakened the pound, forced gilt yields to rise sharply, and created uncertainty over whether the Bank of England (BoE) would intervene to calm the situation.

One option at the BoE’s disposal was to raise its base rate to try to make gilts seem more attractive again.

This uncertainty, and potential higher rate environment, started to feed its way through to banks – especially mortgage lenders.

When it comes to pricing fixed rate mortgages, most lenders take into account the longer-term outlook for base rate movements, gilt yields and swap rates. With the trajectory of these variables becoming increasingly uncertain, many lenders removed their fixed rate mortgage range so they could determine how to reprice their offering.

According to Moneyfacts data, there were over 3,961 mortgages on the day of the mini-Budget. One week later this count had dropped by almost 43%.

Over the following weeks these deals started to feed back into the market, but at much higher rates.

As documented on our website, on the day of the mini-Budget the average two and five year fixed rates stood at 4.74% and 4.75% respectively.

By 20 October, the day of Truss’s resignation, the average two year deal peaked at 6.65% and the five year deal peaked at 6.51%.

The last time these figures were higher was in 2008, during the midst of the financial crisis.

Four days later Rishi Sunak was announced as Prime Minister and rates had already begun to subside.

This fall continued after Jeremy Hunt, who succeeded Kwasi Kwarteng as Chancellor, reversed many of the measures announced in the mini-Budget.

He then delivered his own Autumn Budget, and one week later, on 24 November, the average two and five year rate dropped to 6.12% and 5.92% respectively.

While fixed rate mortgages have fallen, they have come down from an historically high base.

As of May, the average two and five year rates sit at 5.26% and 4.97% respectively, still above the average figures on the day of the mini-Budget.  

If fixed rates are to return to these levels, then lenders will need further certainty in the market.

For instance, they would need to be confident that the BoE will lower interest rates over the long-term – and with inflation still in double digits this isn’t a certainty.

In its latest Monetary Policy meeting, the BoE said although it expects inflation to fall significantly in the second half of the year it will continue to “adjust Bank Rate as necessary to return inflation to the 2% target sustainably”.  

While returning to the era of pre-pandemic fixed mortgage rates might not be a short-term project, fixed rates may well continue to fall in the coming months.

This is according to Rachel Springall, Finance Expert at Moneyfactscompare, who said competition is still increasing in the market.

“It is widely expected that fixed mortgage rates will reduce over the next few months, but this will be determined by fluctuating swap rates and lenders’ appetite for business,” she said.

The price of variable rates, meanwhile, places a greater emphasis on the current BoE base rate – not where it might move in the future.

So, while fixed rates have been reducing, variable rates have continued their steady climb upwards.

The average Standard Variable Rate, for example, has increased every single month since December 2021. This was when the BoE began raising interest rates.

It stood at 4.4% that month, but now stands at 7.37% for this month. 

Meanwhile, the average tracker rate is now starting to gain on the average two-year fixed rate.

In December 2021 there was a 0.76 percentage point difference between the average two year tracker and two year fixed rate. This has now closed to 0.19 percentage points for May.

If you’re on a two year tracker it could rise again this month if the BoE’s Monetary Policy Committee were to raise rates for a 12^th consecutive time.

Ultimately, it will make sense to take out a tracker mortgage if you believe base rate is going to fall. However, there’s uncertainty over whether this will happen any time soon and you might face higher mortgage payments in the shorter term.

The best mortgage for you will depend on several different factors.

Firstly, and perhaps most importantly, you’ll need to consider your monthly budget. It would be unwise to opt for a variable deal if your monthly expenses are already at capacity. In these circumstances it may be best to opt for an affordable fixed rate deal, where you have the benefit of not having to plan your monthly expenses around fluctuating mortgage repayments.

Secondly, you’ll need to consider your longer-term outlook on the BoE’s attempt to bring inflation back to its 2% target.

This insight might be best left to a trusted mortgage adviser. Our preferred mortgage advisers are Mortgage Advice Bureau, and if you’re due to remortgage soon you can speak to them about your options.