Since the central bank’s decision to raise the base rate in December 2021, mortgage rates have experienced a notable surge. What was once a modest average of 2.34% for a two-year fixed deal has now ballooned to an average of 6.76%.

This uptick in mortgage rates can be attributed to the Bank of England’s strategy of gradually increasing the base rate. With the aim of curbing soaring inflation, the central bank has raised the base rate from 0.1% to 5.25%. The connection between interest rates and inflation is an intricate one, impacting the broader economic landscape in multifaceted ways.

Presently, the averages for fixed term mortgage deals are at levels not witnessed since August 2008, a time that coincided with the global financial crisis and the subsequent lowering of the base rate. Understanding the reasons behind this trend and its implications can provide valuable insights for anyone with an interest in the housing market.

Unpacking the factors driving mortgage rate fluctuations

At the heart of the recent surge in mortgage rates lies the UK’s inflation rate, which currently stands at 7.9%. In an effort to bring this figure down to a more stable 2% by 2025, the Bank of England is employing the tactic of increasing interest rates. These rates, often likened to the cost of borrowing money and the incentive for saving, have a domino effect on various aspects of the economy.

Higher interest rates prompt increased savings and more expensive borrowing, which in turn cools down consumer spending and mitigates rapid price increases. This orchestrated “cooling down” of the economy is designed to strike a balance and avoid overheating.

As mortgages are a form of credit, they inevitably bear the impact of rising interest rates. However, the extent of this influence varies depending on the type of mortgage. Those with fixed-rate mortgages enjoy a certain insulation against rate hikes until their fixed term concludes, at which point renegotiation becomes necessary.

Conversely, individuals with tracker mortgages are more vulnerable to rate hikes, as these mortgages follow the fluctuations of the Bank of England’s base rates.

The market responds

The ripple effect of increasing mortgage rates was initially evident in a dip in property sales. However, the property market is displaying resilience, showing signs of rebounding. Notably, June saw a 28% increase in property transactions compared to the previous month, albeit still 9% below June 2022 levels.

Amidst these market shifts, some lenders have caught many off guard by trimming their fixed-rate mortgage deals. This action follows the central bank’s 14th consecutive rate increase. The catalyst behind this move lies in the easing of UK inflation, a development that has bolstered the confidence of banks and building societies to offer loans at more competitive rates.

Lenders, adept at predicting base rate movements, adjust the prices of their mortgage products accordingly. They utilise indicators like gilt yields and swap rates to price their fixed-rate deals. These indicators, known as money markets, have exhibited downward trends, signaling a possible conclusion to the Bank of England’s rate hikes.

Furthermore, lenders are attuned to the evolving housing market landscape. As housing activity moderates and borrower payment challenges increase, lenders are motivated to attract customers by lowering rates.

Major lenders, including Halifax, Natwest, Nationwide Building Society and HSBC, have taken steps to reduce the rates on various fixed mortgage products. These moves are underpinned by the reassurance provided by stabilization in swap rates since their peak in early July.

The dawn of change?

In summary, the current landscape of mortgage rates is inextricably linked to the Bank of England’s efforts to address inflation. Understanding the intricate dynamics between interest rates, inflation and market responses is vital for anyone navigating the property market. The recent actions of lenders in adjusting rates underscore the delicate balance that shapes the borrowing and lending environment.

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