December 05, 2024
Article
The Bank of England’s Monetary Policy Committee (MPC) recently announced it has cut the base rate by 25 basis points, from 5% to 4.75%.
This move was anticipated by the financial markets, due to a continued fall in inflation in recent months. Although news of a reduction in the cost of borrowing is to be welcomed, it has yet to be reflected in immediate changes to mortgage rates.
This is largely due to Rachel Reeves’ recent Budget announcement, which led to an increase in swap rates, the inter-bank lending rate which is based on future interest rate expectations. Swap rates influence the pricing of fixedrate mortgages. When these rates rise it often results in mortgage rates going up, and vice versa when they fall.
Lorraine Balcombe, Mortgage Consultant at Albert Goodman Financial Planning, commented on the announcement:
“News of the base rate reduction will be welcomed by those on tracker or variable rate mortgage products, with monthly mortgage payments being reduced. With the base rate now at its lowest level since June 2023, it is also good news for those coming towards the end of their fixed rate mortgage term.
Mortgage rates have been falling in recent months, with the best deals now below the rates available before the ill-fated mini-Budget in September 2022 when Liz Truss was Prime Minister.
We do expect to see mortgage rates reduce in the coming months and throughout 2025. However, it is now likely the base rate will remain higher for longer due to the impact of the Budget, which included an increase in government borrowing and a rise in employer national insurance contributions, which are both predicted to feed into an increase in inflation.
Some lenders have marginally increased their mortgage rates in response to the anticipated rise in inflation, although we believe this is a short-term reaction. On 29 October, prior to the Budget, the five-year swap rate stood at 3.87%. Immediately after the Budget five-year swap rates increased to 4.08% and have now fallen back slightly to 4.06% as a result of the base rate reduction.
Homeowners should consider that current fixed mortgage rates have already factored in some expected cuts to interest rates throughout next year, likely to benefit the 1.8 million homeowners who are on fixed mortgage deals which expire during 2025. However, rates may not fall as far or as fast as they were anticipated to prior to the Budget.”
How has the budget impacted mortgages?
As a result of the Budget, analysts have reacted by revising down their expectations for interest rates cuts in the medium term. The Office for Budget Responsibility reported Labour’s policies would raise the average level of inflation by 0.6 percentage points during 2025, with inflation falling to the Bank of England’s 2 per cent target in 2029.
Andrew Bailey, the Governor of the Bank of England, said the following in his press conference immediately after news of the rate cut announcement:
“We need to make sure inflation stays close to target, so we can’t cut interest rates too quickly or by too much. But if the economy evolves as we expect, it’s likely interest rates will continue to fall gradually from here.”
A leading US investment bank adjusted its forecast regarding the Bank of England’s interest rates. Prior to Rachel Reeves’ Budget, Goldman Sachs predicted interest rates would fall to 2.75% by November 2025, in anticipation of a more aggressive rate-cutting strategy from the MPC. Following the Budget, Goldman Sachs now predict the bank rate to fall to 3% by next November, with inflation expected to rise moderately due to increased demand linked to GDP growth.
Your home may be repossessed if you do not keep up repayments on your mortgage.