Mortgage rates still on track to fall this year, say brokers

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. 

Some lenders are still quite far from market leading rates.Chris Sykes, Private Finance

This month (January 2023) , the average two-year fixed rate was 5.79 per cent according to 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.

A slow start to the year could even see a mortgage price war break out as lenders compete for business.Rob Gill, Altura Mortgage Finance

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. 

“Some lenders are still quite far from market leading rates as they take a more negative view of the market, or perhaps are awaiting a few more base rate decisions before they make a market share push with more competitive rates,” he explained.

Swap rates are hovering and hopefully soon to be breaking below 4 per cent, whilst GBP is strengthening and increasing steadily against USD.David Gissing, London Mortgage Partners

“I just got a one-year fixed savings bond at 4 per cent, and noticed Coventry is offering a two-year fixed savings bond at 4.1 per cent - speaks volumes to where lenders see money being in the short term. Especially for two-year fixed rates.”

With most five-year fixed rates now cheaper than their two-year counterparts - the average two-year fix is now 0.16 percentage points higher than a five-year fix, according to Moneyfacts - Sykes said “it seems banks feel in the longer term that we’ll see rates cheaper than we are seeing now”. 

He added: “It may just be a gradual decline in fixed rates from here over the next few years.”

‘Swap rates could break 4% soon’

Sykes is not the only broker who suspects mortgage rates will drop further this year.

Mortgage sales head at London Mortgage Partners, David Gissing, said: “While the Bank of England’s base rate is anticipated to increase in early February and potentially push slightly higher into the spring, this increase has likely already been catered for in lending rates.”

“Swap rates are hovering and hopefully soon to be breaking below 4 per cent, whilst GBP is strengthening and increasing steadily against USD.

“Based on the above and various economic forecasts my prediction is that we will see fixed rates from high street lenders around 4 per cent by the end of 2023.”

Swap rates rise and fall in line with where market analysts think interest rates will end up, which is why they act as an indicator for where mortgage interest rates will go.

Two-year swap rates are currently at 4.234 per cent, having fallen since the "mini" Budget but are more than four times what they were at the beginning of last year.

Swap rates

Source: Chatham Financial

Mortgage Advice Bureau’s Michael Lawlor focuses on clients looking for sub-60 per cent loans.

For these clients, he said rates could hit something like 3.95 per cent for a five-year fixed but that average rates will remain around 4.5 to 5.5 per cent for now.

“Less people are able to afford these normal family homes in the area I cover in north London [Finchley]. £1mn doesn’t get you anything amazing.Michael Lawlor, Mortgage Advice Bureau

“I just quoted someone a five-year fix at 4.55 per cent on a £800,000 loan. Payments are £4,000 a month over 31 years,” he explained.

The client had a budget of £3,000 a month, but interest payments have driven their monthly up by £1,000. The price of the house was £1mn, but originally the client was looking at £1.2mn properties.

“£1,000 more a month and a reduced price can only lead to a fall in property prices soon,” said Lawlor.

“Less people are able to afford these normal family homes in the area I cover in north London [Finchley]."

Is a ‘price war’ on the cards?

With some lenders “far from market leading rates”, it has left some brokers wondering whether there might be a price war.

Managing director at Altura Mortgage Finance, Rob Gill, said dips in activity could be what pushes lenders to reduce their interest rates further.

According to the latest Money and Credit report, in November last year mortgage approvals for house purchases dipped to their lowest level since June 2020.

We could even see a base rate cut later this year if inflation recedes and the recession starts to bite.Rob Gill, Altura Mortgage Finance

“Despite bond yields and other money market rates having dropped below pre-’mini’ Budget levels, mortgage rates remain stubbornly higher,” said Gill.

“However, we expect this gap to close as lenders compete for business in the new calendar year, in what looks to be a more challenging environment than 2022. 

“A slow start to the year could even see a mortgage price war break out as lenders compete for business."

Looking ahead, Gill said the future of the base rate “is far from certain”. 

He continued: “Inflation seems set to slow with underlying energy costs having sunk significantly in recent weeks. 

“The UK is almost certainly in recession already, a recession the Bank of England has predicted will last up to two years. 

“This is an unusual environment for the central bank to be hiking the base rate so any rises might be smaller than many expect. We could even see a base rate cut later this year if inflation recedes and the recession starts to bite."

Most borrowers locked in until year-end

The market is bracing for a 4.5 per cent base rate in the coming months.

Leamington Spa-based broker Rachel Dixon said she would expect the February base rate increase to ease inflation pressure.

“We’ll start seeing the fixed rate markets stabilise and drop by summer and the autumn,” she added.

Scunthorpe-based broker Bob Riach said with around three-quarters of UK homeowners on fixed rate deals until the tail end of 2023, monthly payments will remain the same for many in the coming months even if rates do rise slightly before they come down. 

“For these borrowers, the interest rate changes will have no effect on their mortgage rate in the short term,” Riach explained.

“People with a fixed-rate deal due to expire at the end of 2023 are facing an average increase of £250 a month, according to the Bank of England Financial Stability Report. Locally, I’ve seen this to be £150 per month.”

ruby.hinchliffe@ft.com