The Bank of England (BoE) has opted to maintain the base rate at 5.25%, marking the fifth consecutive pause since August last year, following 14 consecutive increases. Chris Sykes, Technical Director at Private Finance, explains what this decision means for the mortgage market in the UK.

The BoE’s choice to hold the base rate comes on the heels of February’s inflation data release yesterday by the Office for National Statistics (ONS). Consumer Prices Index (CPI) inflation rose by 3.4% in February, its lowest point in over two years, and a decline from 4% in January. This figure, 0.1% lower than some economists’ predictions in a Reuters poll, has sparked optimism for a potential interest rate cut by the Bank of England in the summer months and to continue reductions into next year – certainly welcome news for many! Current forecasts expect that CPI inflation will slightly undershoot the government’s 2% target in the second half of this year.

Of particular interest to the BoE is the state of services price inflation, a metric closely monitored for insights into domestic inflationary pressures, and UK wage growth. There have been promising signs lately: services price inflation eased to 6.1% from January’s 6.5% and annual wage growth slowed to 5.6% in the three months to January, including a slight uptick in the unemployment rate to 3.9%. Yet these metrics continue to be a concern for the BoE as labour markets continue to remain relatively tight by historical standards. Their vigilant stance reflects their commitment to keeping these factors in check to mitigate the risk of escalating price growth.

How does the base rate affect mortgage rates?

It is important to remember that the direction of the base rate has little to no direct impact on fixed rate mortgage pricing in the short time. However, the direction of the base rate does play a crucial role in variable mortgage product pricing, such as tracker rates, and influences other key variables such as SONIA (Sterling Overnight Index Average) swaps and lenders’ cost of funds, which do have a stronger influence on fixed rate mortgages.

Over the past 12-24 months, the changes in the base rate, swap rates and inflation figures have been significant players impacting mortgage rates. For example, where the inflation figures have been positive or better than expected, this has typically influenced a drop in swap rates and thereafter mortgage rates. Equally this does apply in the reverse fashion.

This trend can be seen more recently by the huge rate reductions we saw in January and then their subsequent increases in February and March. Thankfully, five-year swap rates have been decreasing following the Spring Budget.

What’s next for fixed rate mortgages?

Overall, we are optimistic where the mortgage market will be for the remainder of 2024 and while it may continue to be a rollercoaster, guidance from an expert mortgage broker can make that as smooth as possible for you. Despite the occasional increase, average rates for fixed term loans have declined significantly since their peaks in late 2022 and mid-2023. At present, several lenders are offering five year rates of under 4.5%.

Given the uncertainties surrounding future rate movements, a significant shift we’ve observed is that the majority of lenders now offer the option to secure a rate up to 6 months in advance of their current deal ending. This allows borrowers to effectively plan their finances with clarity and in a timely manner. Furthermore, even after submitting your mortgage application, there remains the opportunity to take advantage of potential rate decreases that may occur before the completion of the process.

Many lenders offer us the flexibility to switch products before completion on the mortgage, whether it’s for purchases or remortgages. With remortgages in particular, our advice to clients is to secure a rate that aligns with their requirements six months prior. We will then endeavour to continuously review this choice regularly to ensure we’ve locked in the most competitive rate available to them during that timeframe.

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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