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Era of ‘rock-bottom’ mortgage rates is over – analysis
Lenders have been cutting rates to less than 4%, with Nationwide announcing that rates on some of its products would fall to as low as 3.78%. But how much further mortgage rates will continue to fall has been thrown into doubt amid an ever-evolving wider economic landscape.
Mortgage Solutions speaks to industry insiders for their views on what is happening in the mortgage market and where they believe rates will fall to in this current cycle.
Forecasts revisited after inflation rises
With inflation having been on target at 2% for two months, it was thought that the Bank of England would cut interest rates several times later this year.
However, after its cut at the beginning of this month and inflation creeping up marginally, many believe that anything more than one additional cut before the end of the year is no longer on the table.
It means that mortgage rates may not fall as much as expected earlier on in the year.
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Indeed, since the start of July, the lowest five-year fixed rate has dropped from 4.28% to 3.83%, while the lowest two-year fix has fallen from 4.68% to 4.22%, according to Moneyfacts.
Where are the ‘rock-bottom’ rates?
What appears to be more certain, however, is that the days of rock-bottom mortgage rates beginning with a one or two are over.
Darius Karpowicz of Albion Financial Advice explained: “We’re seeing some real momentum with lenders cutting rates, particularly for products with lower LTVs.
“I expect we’ll soon see more significant changes in the higher-LTV, lower-deposit space too.
“While many borrowers are starting to accept that the era of rock-bottom rates is over, there’s still a group hoping those super-cheap rates will return.
“And then there’s the minority, like me, who think it’ll be a very long time before we see mortgage rates starting with a one or two again.”
John Yerou, managing director of Freelancer Financials, agrees that mortgage rates will continue to fall, and that the days of ‘cheap money’ are over.
He said: “There’s a generation of people who got used to cheap money. When interest rates were between 1% and 2%, that was just not real. Rates have never been that low in the last 100 years.
“When cheap money is there, you have a buoyant property market, with people buying because they have confidence.
“Prior to the credit crunch in 2008, the average rate [that] was considered good was around 6% or 7%. Back in 2005, 2006 or 2007, before the financial crisis, if you were given rates between 4% and 6%, you jumped on it.”
Return of the sub-2%?
Yerou went on to say that “people need to recalibrate and realise the return of the sub-2% won’t happen.”
“When we talk to borrowers or people six months away from remortgaging, and suggest ringfencing a deal for them now [that] we will monitor in case they fall, they tell us they don’t mind going on the standard variable rates [SVRs] for the next few months because they think the Bank of England will cut rates a few more times.
“At the beginning of the year, we were being told there would be at least four rate cuts this year, so people hang in there.
“We tell them not to sit on the SVR and put them on a tracker until they feel comfortable to fix their deal. But people have the belief that rates will fall substantially, more than what they will do.
“There’s a recalibration that needs to take place where people realise the new norm is the old norm,” he said.
How much further will mortgage rates fall?
If borrowers are not going to see rates back at 1% or 2%, where will costs bottom out?
For Yerou, that is likely to change as the economic outlook continues to shift.
Indeed, it seems to be a fast-changing environment. Following the honeymoon period of the general election, Keir Starmer attempted to manage expectations ahead of the Autumn Statement on 30 October.
He warned about the country needing to accept “short-term pain” for “long-term good”.
He said that the Autumn Budget, to be delivered by the new Chancellor Rachel Reeves, will be “painful”.
The Prime Minister added that “those with the broadest shoulders should bear the heavier burden”, after previously pledging to avoid hiking taxes.
Sir Keir is expected to increase taxes in several areas, including capital gains tax (CGT), prompting landlords to fear they may have to sell their property to avoid losing money.
Where will rates fall to?
There is certainly plenty to discuss about the housing market when Parliament returns from summer recess.
Yerou went on to say: “Even if everything works out and there are no more economic shocks and interest rates fall further, we won’t see rates come down below 3%. I don’t think we’ll even see rates go below 3.5%.
“Lenders started reducing rates before the Bank of England cut the base rate because they needed the business.
“They need to meet their targets and are sacrificing their margins, so they’re getting into a price war to see how they can boost their books.”
What is the ‘new norm’?
The economy remains fragile as it adjusts to the new government and awaits the implementation of its policies.
Borrowers need to be able to follow suit and do their own adjusting to the new mortgage rate environment.
Elliott Cully, director of Mortgage Finance, said: “There is confidence the base rate may fall further, which should install further confidence in the mortgage market and should drive rates lower.
“However, we have been in this position before with rates falling into the 3%s, only to be brought back to the new reality we face. The economy is still fragile and we are not out of the woods completely yet.
“The new normal is likely to be rates in and around the 3% mark, the days of 1-2% are in the rear-view mirror.”
Borrowers need to remain cautious
Gabriel McKeown, head of macroeconomics at Sad Rabbit Investments, said: “The Bank of England’s recent decision to reduce its base rate from 5.25% to 5%, combined with an anticipated further rate reduction at the tail end of the year, has sparked optimism among homeowners and prospective buyers.
“With inflation expected to continue its downward trajectory, this improving economic backdrop would be a welcome relief from the challenging environment for borrowers who were accustomed to historically low rates.
“This trend has led to sub-4% mortgage rates becoming more prevalent for fixed rate products.
“However, despite this positive economic outlook, borrowers should remain cautious and informed about the broader factors at play in this ever-evolving landscape.”
A five-year 3.5% deal before Christmas?
Mark Harris, chief executive of mortgage broker SPF Private Clients, explained: “The first rate cut since the pandemic sends out an important message that rates have peaked and are on a downwards trajectory.
“How fast further rate reductions come will depend on the state of the economy and inflationary pressures.
“Swap rates were falling before the August rate cut and have enabled lenders to engage in a mortgage rate war.
“Competition among the ‘big six’ lenders is driving rates lower and borrowers are seeing the benefit. It is not unfeasible that we could see a 3.5% five-year fix by Christmas.”
He added: “Nationwide is the latest lender to cut its five-year fixes – and, even better, it is also offering competitive pricing to those remortgaging, as well as to homemovers and new purchasers.
“Lenders have been favouring the latter over recent weeks, offering the cheapest five-year fixes to bring in new business, rather than cater for those remortgaging.
“Borrowers coming up to remortgage [will] be breathing a sigh of relief – yes, their mortgage payments will go up, but not by as much as feared. Other lenders are likely to follow suit and trim their own rates, offering borrowers more choice at better pricing.”