Have mortgage rates now peaked?

Following the Bank of England's decision last week to freeze interest rates for the first time in 15 months, Sarah Thompson, Managing Director at Mortgage Scout, looks at the possibility of the base rate falling significantly in the future.

Related topics:  Finance,  mortgages,  Base rate
Sarah Thompson | Mortgage Scout
25th September 2023
Question 901
"Capital Economics had previously predicted that rates would peak at 5.5%, lower than previously forecast and so perhaps this will never be materialised. This is likely to be followed by continuing falls in mortgage rates, which is good news for borrowers"
- Sarah Thompson - Mortgage Scout

Since the Bank of England base rate started making large jumps around the middle of last year, mortgage rates have increased significantly from the historic lows that borrowers had enjoyed since early 2015, when the average two-year fixed rate dropped below 2% and the average five-year fixed went sub-3%.

By the autumn of 2021, average two-year fixed mortgages were just 1.2%, with some borrowers able to access a rate of below 1%, and average five-year fixed rates were less than 1.3%.

But in December 2021, the bank rate started to rise from its all-time low of 0.1% and mortgage interest rates followed suit, as is the norm. Some mortgage rates spiked to over 6% following the Conservatives’ disastrous mini-budget last September, although they did start to fall again once Rishi Sunak took over as leader.

By the time we entered 2023, the average two-year fixed mortgage rate was just under 5.8% and the Bank Rate stood at 3.5% with experts predicting further increases before the summer.

What’s happened to mortgage interest rates so far this year?

At the start of the year, even with the bank rate rising and inflation still high, mortgage rates continued their steady decline from the November 2022 peak. In February, two and five-year fixed rates were 5.44% and 5.2% respectively, then in March, those figures dropped to 5.32% and 5%.

But by May, as repeated base rate increases failed to have an impact on inflation, lenders began to backtrack and in mid-June, the average two-year fixed mortgage rate rose to over 6%.

Individual rates have started to come down again

However, that is just an average figure, and the good news is that individual rates have started to come down again, mainly thanks to significant falls in the rate of inflation, which is now expected to reduce to 5% by the end of this year and then reach the target of 2% by the start of 2025.

In July, HSBC became the first high street lender to announce that it was making some cuts to its fixed-rate products, with other major lenders – including Nationwide, Barclays and Virgin Money - following suit over the next month. As it stands in September, first-time buyers can access five-year fixed rates at well under 6% and two or three-year fixed products at slightly above 6%.

Five-year rates are lower than two-year rates

It’s worth noting that it’s fairly unusual for a five-year rate to be lower than a two-year one, as has been the case for around a year now. This is the strongest possible indication that lenders do believe the base rate will fall significantly in the future.

Despite a 14th consecutive increase at the start of August, to 5.25% we have now, as of 21 September, seen the first freeze in 15 months. Capital Economics had previously predicted that rates would peak at 5.5%, lower than previously forecast and so perhaps this will never be materialised. This is likely to be followed by continuing falls in mortgage rates, which is good news for borrowers.

Speak to a broker

There are so many variables to consider, that if you want to buy or need to remortgage this year, we think it’s well worth talking to a mortgage broker sooner rather than later, allowing at least six months to go through the remortgage process.

Mortgage applications can be held up if documents are missing, so make sure you gather what is required and provide them with all the necessary information as soon as possible.

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