When Will Mortgage Rates Fall and How Will Your Mortgage be Affected?

Inflation has dropped down to its target of 2% from its highest peak in October 2022 of 11.1%. The Bank of England held the base rate yet again in June at 5.25%, so what does this mean for a potential rate drop and how does it affect our mortgages? Below you will find the latest predictions for interest rates, how that will affect your mortgage, and what you can do to help you through, brought to you from your most reliable mortgage broker in Manchester.  

What’s Happened to Interest Rates?

The Bank of England has control over the base rate, which they move to try and control inflation. By raising interest rates, you also raise the cost of borrowing for individuals and businesses, therefore reducing the demand. This then slows the flow of new money into the economy, which in turn lowers inflation. In contrast to this, cutting interest rates lowers the cost of mortgage rates and other forms of borrowing, which increases demand and in turn, increases inflation. Due to the Covid lockdowns and the energy crises triggered by the Russian invasion of Ukraine, we saw a major spike as CPI (consumer price inflation) skyrocketed into double figures, which in turn saw the BoE raise the base rate from a record low of 0.1% slowly up to today’s 5.25%. The market-implied path for the base rate is that it will reach around 3.75% by the end of 2026.  

How Do Interest Rates Affect Mortgages?

In a nutshell, interest is the money you pay a lender in return for borrowing from them, where you will pay a percentage of the amount you borrowed, known as the interest rate. The lower the interest rate the less you will pay to the lender in borrowing costs. However, mortgage rates are not directly linked to the Bank of England, although they do have a significant impact. Future market expectations for interest rates, bank funding and lending targets, and appetite for business are what really make a difference. Swap rates are also something that make a significant difference to interest rates for mortgages and they are essentially an agreement between 2 banks who exchange a stream of future fixed interest payments for another stream of variable ones, based on a set price.    

When Will Interest Rates Fall?

The market currently expects a late summer or early autumn rate cut, whilst keeping an eye on disinflationary factors such as unemployment growth and stalling economic growth. There are many concerns about the risk of slowing down the economy whilst keeping the base rate at 5.25%.

What Does it Mean for My Mortgage?

Ultimately, a drop in interest rates should mean a drop in mortgage rates, but whilst the year started out with interest rates on a downward trajectory, this was swiftly reversed in Spring when we saw a rush of mortgage rate rises. So, it’s important to remember that the market is volatile. If you are on a fixed-term deal, then it’s important to keep an eye on where markets are forecasting the base rate in the future and how this will tie in with when their fixed rate ends. If you are coming to the end of a fixed-rate deal, then it’s possible you could be hit with a rate far higher than you are currently on. Also, if you fail to remortgage before your deal ends then you could end up on your lender’s standard variable rate (SVR), which can be as high as 9.73%. At present the average 2-year fix is 5.97% and for a 5-year, it’s 5.53%, which is quite a jump from the 2% of the majority of current fixed-term deals.  

Support and Advice from Your Trusted Mortgage Advisor in Manchester

If you are due to remortgage this year and are feeling overwhelmed with where to start, wondering if rates are going to drop or rise further, then Taylormade, an independent mortgage advisor in Manchester can help. We are a leading mortgage broker based in Manchester, operating all over the UK and we offer jargon-free, helpful advice to aid you in understanding today’s uncertain mortgage market. Contact our specialist mortgage broker in Manchester today to see how we can help.