Forecasting mortgage rate movements is never easy, and with the New Year approaching, the current market outlook remains as uncertain as ever.

The main culprit? You guessed it – inflation.

Despite key events such as the Autumn Budget, October’s inflation data, and November’s Bank of England (BoE) base rate decision already behind us—and the U.S. election concluded—mortgage rates have continued to fluctuate.

On November 7th, the BoE lowered the base rate by 0.25% to 4.75%, a move widely expected by analysts. As a result, the decision was likely already priced into fixed mortgage rates, having minimal immediate impact on the market.

Likewise, recent consumer Price Index (CPI) inflation data, revealed that CPI rose to 2.3% in October, slightly surpassing some expectations by 0.1%, and up from 1.7% in September. According to the Office for National Statistics (ONS), this increase was largely driven by higher energy and housing costs, bringing inflation above the government’s 2% target.

The BoE has fared well in its inflation crisis. One year ago, expectations were so that inflation was expected to be above 3% in the final quarter of 2024, the base rate above 5%, and unemployment close to 5%. However, the reality is much more positive. Consumer Price Index (CPI) inflation is hovering around the BoE’s 2% target, the Bank’s interest rate is now at 4.75% in November, and unemployment is at 4.3%.

Inflation concerns and mortgage rates

Despite this, the concern largely lies in future inflation risks. SONIA (Sterling Overnight Index Average) swap rates, one of the primary factors affecting fixed mortgage rate pricing, are based on market expectations for future central bank interest rates over a specific term. They offer lenders a level of predictability in setting mortgage rates.

Following the Autumn Budget and the US election, market expectations for inflation over the coming years have mostly risen. The government’s annual spending plans, alongside Trump’s tax cuts and tariffs viewed as inflationary, have unsettled markets. This could mean that the Bank’s interest rate may not come down as fast as some had hoped over the next few years, keeping swaps—and consequently mortgage rates—elevated.

Quite a few lenders have been increasing mortgage rates, as inflationary concerns cloud the outlook for the New Year, though interestingly, others have chosen to decrease theirs. Decreases are more typical of this time of year as lenders strive to attract last-minute business to meet their end-of-year targets. However, we suspect some of these reductions may be corrections from rates initially set too high to remain competitive.

Act now to lock in stability

In such an unpredictable market, acting now and locking in your mortgage rate could be a wise decision. Most mortgage offers are valid for six months, meaning borrowers can lock in today’s rates to protect against potential future increases, while still having the flexibility to reassess if rates drop closer to their completion date. Encouragingly, average mortgage rates are more favourable compared to a year ago, according to Rightmove.

Working with an experienced mortgage broker can ensure you’re prepared to make the most of any opportunities that arise as market conditions evolve. You can reach our team on 0800 980 8777 or email info@privatefinance.co.uk. You can also book an appointment at a time that is convenient for you here.

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

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