The Paradox of Rising Mortgage Rates Amidst Bank of England Rate Cut

In a surprising turn of events, the UK housing market is witnessing an unexpected trend: mortgage rates are on the rise despite a recent cut in the Bank of England’s base rate. This paradoxical situation has left many homeowners and prospective buyers puzzled. Let’s delve into the reasons behind this phenomenon and explore its implications for both mortgages and savings.

The Bank of England’s Rate Cut

The Bank of England recently announced a reduction in its base rate from 5% to 4.75%. This marks the second 0.25 percentage point cut since August, signaling the Bank’s confidence that the UK’s inflation woes are subsiding. With consumer price inflation down to 1.7% in September from its peak of 11.1% in October 2022, it seems the aggressive rate hikes of the past two years have achieved their goal of curbing inflation.

The Counterintuitive Rise in Fixed Mortgage Rates

Despite this rate cut, major banks including Halifax, HSBC, Virgin Money, and Coventry Building Society have increased their fixed mortgage rates by up to 0.25 percentage points. The average two-year fixed-rate deal has risen from 5.39% to 5.42%, while the average five-year fix has increased from 5.09% to 5.13%. This trend has left many wondering: why are fixed mortgage rates going up when the base rate is going down?

Understanding the Disconnect

The key to understanding this apparent contradiction lies in how banks determine their fixed-rate offerings. While variable rates are closely tied to the current Bank rate, fixed-rate deals are more influenced by future rate expectations. Banks use what are called “swap rates” to price their fixed-rate loans. These swap rates reflect market predictions of where the Bank rate will be over the term of the loan.

Recent events, particularly the UK budget announced on October 30, have led to an increase in swap rates. The budget’s provisions for higher government borrowing and increased employer national insurance contributions are expected to contribute to higher inflation in the future. As a result, the two-year swap rate has risen from 4.06% on October 30 to between 4.27% and 4.29% this week.

Impact on Variable Rates and Savings

While fixed-rate mortgages are seeing an increase, there is some good news for the 1.32 million homeowners with variable mortgages. These rates are expected to fall in line with the Bank of England’s rate cut. Similarly, savers with easy-access accounts or ISAs are likely to see a decrease in their interest rates.

Interestingly, fixed savings rates have also seen an uptick. The past week has seen 22 new fixed-rate bonds and ISAs enter the market, including new best rates for various terms. For instance, the best one-year bond rate has increased from 4.8% to 4.85%.

Advice for Homeowners and Potential Buyers

Given the current market conditions, those with fixed deals ending in the next six months or those looking to buy a property might want to act sooner rather than later. The lowest rates have not yet increased, presenting a window of opportunity. For example, the lowest five-year fix available at up to 60% loan-to-value ratio is 3.79% from Allied Irish Bank.

It’s worth noting that you can usually secure a new deal with a different lender up to six months before your existing one ends. This allows you to lock in a rate now while retaining the flexibility to switch if rates fall by the time your current deal expires.

Looking Ahead

Experts suggest that mortgage rates may continue to rise in the short term. Simon Gammon from Knight Frank Finance predicts a “pretty wholesale repricing across the market” if swap rates don’t start to turn next week.

For savers, the outlook is more positive. Kevin Mountford, co-founder of Raisin UK, suggests that the competitive UK market could keep savings rates “artificially high,” potentially providing above-inflation returns for the next few years.

Conclusion

The current situation in the UK mortgage and savings market underscores the complex interplay between central bank policies, market expectations, and global economic factors. While the Bank of England’s rate cut might suggest lower borrowing costs, the reality is more nuanced. Homeowners and savers alike need to stay informed and be prepared to act swiftly to secure the best deals in this dynamic financial landscape.