Bank of England (BoE) Governor Andrew Bailey has suggested that the UK may be nearing the peak of its interest rate cycle after the bank decided to half the rate hike in September. The base rate now remains at 5.25%.
As inflation continues its steady fall to 6.4% in July from its peak of 9.3% in September 2022, the property market has also seen recent fluctuations in transaction figures. July showed a modest 1% month-on-month increase in seasonally adjusted residential transactions. However, both residential and non-residential transactions are significantly lower, down 16% and 6%, respectively, compared to the same period last year.
So, is it a good time to secure a mortgage?
Lenders are cutting rates
UK mortgage rates have started falling after months of consistent increases. Some of the largest lenders in the country that have announced in August and early September about their reductions include:
HSBC UK has reduced 20 mortgage rates including its 75% loan to value (LTV) two-year fixed rate by 0.10% to 1.39%.
Santander UK’s 75% LTV five-year fixed- rate residential purchase mortgage is now at 5.20% from 5.30%.
NatWest cut its five-year fixed rate mortgage with 5% down payment by 0.35% from 6.39% to 6.04%.
Accord Mortgages cut some of its selected 95% LTV rates by up to 80 basis points (bps).
Virgin Money reduced its 75% LTV two-year fixed mortgage to 5.87%, down by 12 bps.
Nationwide Building Society lowered its fixed and tracker rates by up to 0.15 percentage points.
So, what's the reason behind this?
Lenders actively respond to potential changes in the BoE's base interest rate by adjusting the pricing of their mortgage products. Bailey's announcement also influenced the drop in swap rates, which banks use to price mortgages.
When banks lend money through fixed-rate mortgages, they are committing to pay a fixed interest rate over the life of the loan. To hedge against the risk of fluctuating interest rates, banks often use interest rate swaps to offset this risk.
Swap rates also indirectly affect variable-rate mortgages, which are often tied to a benchmark like the London Interbank Offered Rate (LIBOR) or the BoE’s base rate. When swap rates rise, it can put upward pressure on these benchmark rates, leading to higher interest costs for borrowers with variable rate mortgages.
Second, banks are attuned to the housing market's deceleration as well as the growing number of borrowers facing repayment challenges. With house prices still significantly higher than pre-pandemic levels, lenders have to lower mortgage rates to remain competitive as they continue to strive to recover from lost business during the height of the pandemic.
HSBC started reducing mortgage rates in July and what we are seeing now are more lenders following suit. As major banks become more aggressive at offering competitive deals, we might see rates below 4% very soon.
Finally, the positive news about inflation data suggests that these reductions might continue if economic conditions permit. We're seeing market confidence in the stability of the base rate and more lenders being very determined to attract borrowers in a tight market.
As such, with more mortgage lenders offering more attractive rates means, you may benefit from lower interest rates on their mortgage to make home ownership more affordable.
Average rent rose in July
Private rental prices paid by tenants increased by 5.3% in the 12 months to July 2023, up from 5.2% from the previous month. London's rental market witnessed a substantial upsurge, reaching its highest annual rate since the ONS started tracking in 2006.
In parallel, the broader UK also experienced significant annual private rental price increases, with England, Wales, and Scotland recording upticks of 5.2%, 6.5%, and 5.7%, respectively.
One reason for this is the growth of buy-to-let landlords putting their properties on the market due to surging mortgage rates. According to the HM Revenue and Customs’ capital gains tax records data, landlords sold 151,000 properties in the 2022-2023 tax year, rising 56% from the previous period.
This trend also highlights the transition that had already begun during the initial Covid-19 lockdown. Consequently, with more of these properties being sold, it contributed to the tight supply of lettings and a surge in rents.
Securing a mortgage offers the advantage of shielding you from the unpredictability of rental markets, which are currently displaying no indications of slowing down in the coming months.
And given the ongoing upward trajectory in property prices (the average house price in the country reached £288,000 in June—an increment of 1.7% over the past year), you may need to lock in a low mortgage rate to protect you against further hikes in property prices.
What to consider when applying for a mortgage
If your fixed-term mortgage is approaching its end, you need to decide whether to secure a new long-term fixed-rate agreement or revert to your lender's potentially more expensive standard variable rate (SVR).
A big part of your decision will depend on your expectations regarding future interest rate shifts. Opting for a fixed rate involves considering the duration of the fix, such as a two-year or five-year commitment, though the difference in rates between these options has been relatively narrow since the financial crisis in 2008.
Longer-term fixed rates, such as a 10-year deal, come with higher interest costs, and committing to such a mortgage term may not be advantageous when rates fluctuate.
The choice of what mortgage to secure therefore depends on your financial goals and risk tolerance. That's why many of those interested in taking a mortgage make sure to work with a mortgage adviser. These experts can provide valuable insights and align your choice with your unique needs and eligibility based on credit score, location, and deposit.
Contact a mortgage adviser today
Whether you're a first-time buyer, home mover, or looking to remortgage, a mortgage adviser can certainly look after your needs and interests.
The Mortgage Hut team provides expertise to help you assess your finances, and offers tailored advice to increase your chances of mortgage approval. With access to diverse mortgage products, our advisers can guide you on making the best choice for your financial needs.