On August 1st, the Bank of England’s Monetary Policy Committee (MPC) voted to reduce the base rate by a quarter of a percentage point, bringing it down to 5%. While some anticipated this decision, the timing appears to have caught many by surprise.

This article aims to clarify what this decision means for your mortgage and outline the next steps you should consider. If you would prefer a personalised consultation, please feel free to contact our team at 0800 980 8777 or email us at info@privatefinance.co.uk.

Impact on Swap Rates and Lender Responses

This unexpected move appears to have had an immediate positive impact on financial markets, particularly on SONIA (Sterling Overnight Index Average) swap rates, which dropped following the MPC’s announcement. On August 1st, 5-year swap rates fell to 3.6%, creating a wider margin below the 4% mark and providing more capacity for lenders to consider rate reductions.

Swap rates are critical as they influence lenders’ pricing for fixed mortgage rates. While it might take some time for lenders to adjust their rates based on these new swaps, as they wait for these to stabalise, the overall trend in mortgage rates is expected to be downward over the year, which is likely to provide relief for borrowers.

The decision to lower the base rate to 5% comes after inflation returned to the government’s inflation target of 2% in May and June. Some analysts expect one or two more base rate reductions this year which could further lower borrowing costs. However, persistently high service price inflation could complicate these expectations. Despite the base rate cut, Bank of England Governor Andrew Bailey has cautioned that interest rates are unlikely to fall rapidly.  However, the vote to reduce the base rate has indicated that the MPC believes the fundamental drivers of inflation are now under control.

Effects on Existing Mortgages: Tracker and fixed-rate mortgages

Tracker mortgages

This development is positive news for those on any variable rate product and should offer some financial relief. For those with existing tracker mortgages linked to the Bank of England’s base rate, the rate cut will directly reduce monthly payments, with savings likely reflected in the coming month. Similarly, standard variable rate (SVR) and discount variable mortgages are expected to see reductions, although not all lenders have confirmed their new rates yet. It is yet to be seen whether they will pass on all or just some of this reduction.

Fixed-rate mortgages

For clients with fixed-rate mortgages nearing renewal, it remains crucial to start searching for a new mortgage deal at least six months before your current term ends.

If you have a current mortgage application in process—whether for a purchase or remortgage—it is advisable to reassess whether the deal you initially selected is still the best option before completing on your mortgage. Lenders are likely to continue to adjust their pricing over the next few weeks and it is key to continue to monitor the situation during this time.

Mortgage brokers should be closely monitoring the current situation, and check if their clients can benefit from any rate reductions. Likewise, if you have applied for a mortgage with a lender directly, it could be beneficial to consult a broker to ensure you’re getting the best possible deal in this new lending environment.

It is important to know that most lenders will not monitor the market for better deals on your behalf, nor is it a requirement of a mortgage broker. As a client-first specialist mortgage broker, we prioritise securing the best rates and terms for you. Switching to a lower rate could save you thousands over the fixed term of your mortgage.

Are mortgage rates going down?

Yes, some mortgage rates have been decreasing ahead of the latest base rate decision. For instance, we’ve already seen five-year fixed-rate mortgages dip below 4%. Now that 5-year swap rates have fallen further, there is more capacity for mortgage rates to decrease, though this will depend on individual lenders’ strategies and their competitive position. We expect more competitive rates to emerge, particularly for sub-4% five-year fixed rates on lower-risk loans, such as those with lower loan-to-value ratios. However, two-year fixed rates are likely to remain above 4% for the time being, as shorter-term swaps still reflect higher rates.

More borrowers may qualify for larger loans

One of the most significant outcomes of the base rate reduction is the improvement in affordability stress testing by mortgage lenders, for both buy-to-let and residential products.

In the residential market, lower stress rates could mean that borrowers may now qualify for larger loans, as reduced standard variable rates (SVRs) improve affordability assessments. Lenders often stress test based on their SVR, so if the SVR decreases, the affordability profile improves, potentially offering more flexibility in lending options.

Many borrowers have been opting for longer five-year fixed terms to stretch their borrowing capacity. The affordability improvements could provide more flexibility for borrowers to choose shorter-term products and potentially increase market activity as more options become available.

Autumn release of pent-up demand

Autumn could be a busy period for the housing and mortgage market, as many individuals who had previously delayed their plans in anticipation of lower borrowing costs may now be reconsidering their property decisions. Recent reductions in mortgage rates reflect lenders’ expectations of future rate trends, meaning current rates may be among the most favourable you’ll find this year. Waiting to buy later could be risky, as property prices may increase if demand surges in the typically active autumn market.

In summary, the base rate reduction has set the stage for potential rate cuts across various mortgage products. Borrowers should stay informed and work closely with their brokers to take advantage of these changes, particularly those with upcoming renewals or current applications in process. While uncertainty remains regarding the future of base rate decisions for the rest of 2024, the current indicators and expectations point to a positive shift in the lending environment, potentially opening up more options for borrowers.

If you would like to discuss your mortgage options with a qualified professional, you can speak to one of our mortgage consultants on 0800 980 8777, or via email at info@privatefinance.co.uk

Please remember that your home may be repossessed if you do not keep up repayments on your mortgage.

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