Mortgage interest rates are still set to fall this year despite a further expected rise in the base rate next month, with some brokers predicting 4 per cent fixed rates by year-end.
Back in November, brokers said rates were on track to fall back to 4 per cent “in the not-too-distant future” following successive cuts to fixed rates made by lenders.
Now, they are saying this “not-too-distant future” will likely be the end of 2023.
This month (January 2023) , the average two-year fixed rate was 5.79 per cent accordingto MoneyFacts. A year earlier, it was 2.38 per cent.
Rates climbed steadily in the first half of 2022, triggered by a base rate rise in December 2021 - the first time the Bank of England had raised the base rate in more than three years.
The rise signalled a shift in the market, away from record low rates to a rising interest rate environment.
Between 2013 and 2021, the base rate had peaked at 0.75 per cent. It is now 3.5 per cent, over four times its previous peak and brokers reckon it could hit 4.5 per cent in the first half of this year.
But, despite another base rate hike on the horizon, brokers are confident lenders have priced in the increase - much like the last two hikes, which followed former chancellor Kwasi Kwarteng’s explosive "mini" Budget.
The "mini" Budget included the biggest package of tax cuts in 50 years.
Though eventually reversed, their inclusion sent up the price of government borrowing, along with gilt yields which indirectly impact mortgage rates.
This meant at the beginning of November, a month after the "mini" Budget had taken hold, mortgage rates had nearly tripled, from 2.38 to 6.47 per cent.
This is why many brokers still believe future base rate rises have already been priced into mortgage rates, because rates jumped so much in October as lenders struggled to predict the market.
Since November, average mortgage rates have been trending down. Two-year fixed rates have fallen 0.68 percentage points on average over the past two months, according to Moneyfacts.
“Rates settled in the last couple of weeks of 2022, and as we usually see slightly lower rates in January due to new targets for lenders, I think many lenders decided to reduce rates early in December while it was quiet ready for 2023,” director of Private Finance, Chris Sykes, told FTAdviser.
“The direction of rates now is hard to tell. Swap rates [a leading indicator for mortgage rates] have been more stable lately and looking at the margins against swaps, it seems the cheapest fixed rates in the market have stabilised for now and we can likely expect they will be around these levels for a little while.”
Sykes said there is still some capacity for some lenders to reduce their rates, which could bring down average mortgage rates across the UK.