These are the headlines I’ve seen today and although they are clearly designed to grab your attention they are pretty much right in that it is widely expected that interest rates on offer to mortgage borrowers are going to decrease this year.
Unless you have been living in a cave for the last couple of years you will be aware that the UK has experienced a significant shift upwards in the Bank Of England base rate and this led to mortgage lenders increasing the rates at which they will lend to the likes of you and me.
What happened over the last couple of years, starting with the lockdown in 2020 was that there was a great amount of inflationary pressure being put on the UK economy. The supply of money increased significantly over the “covid” period (so-called quantitative easing) and the Bank of England did not really prepare themselves for the inevitable inflation that they perhaps should have predicted. Consistently saying that the inflation was transitory throughout 2021 they did not look to use the tools at their disposal (Base Rate Increases) until 2022, at this point inflation was over 10%, their target being 2%.
Starting in December 2021 came many consecutive interest rate rises, leading to mortgage rates increasing along with those. As of the close of 2023, the Bank of England sat at 5.25% and just about two years earlier it was at the historic low of 0.1%.
So why are the headlines now saying rates are likely to decrease? The reason is mainly down to inflation. Finally, after a couple of years of the cost of living crisis, we are beginning to see inflation returning to more manageable levels. That doesn’t mean the cost of living crisis is over as prices are much higher now than they were two or three years ago. However, the rate of increase is definitely slowing. I certainly have noticed the price of fuel has come down quite a bit over recent months and that is certainly going to help on the inflation front.
So if inflation returns to more manageable levels then the Bank of England will then turn to the economy to see what is going on there. Right now we are experiencing zero and possibly negative growth. Therefore we are on the brink of recession. I think this coupled with the reducing inflation will give the Bank of England the necessary reasons to reduce the Bank Base Rate. When this happens is difficult to predict, the Monetary Policy Committee meet later in January and it is expected they will hold rates, the decrease is likely to come later in the year.
The good news for borrowers is that “swap rates” are coming down in anticipation of the Bank of England Base Rate decreasing later this year. Swap rates are a good indication of what the lenders are likely to do as they are the rates at which lenders lend money to each other. At the time of writing we are seeing some high street lenders offering sub 4% fixed rates for five years, also the two-year deals are coming down a little. The best offerings are for those with higher deposits or higher equity of 40% or more. This has always been the case however rates are coming down for the customers with lower equity or deposit too.
My predictions are that over the course of 2024, we will see further interest rate decreases on offer from lenders and by the end of the year I predict the Bank of England Base Rate will be 4.5%. Keep an eye on a couple of other factors though. Wage increases do fuel inflation so if wages outstrip inflation (which they are not doing right now) then expect a rate rise. Another factor is the growth, or lack of, of the economy. Falling growth equals recession, this impacts lots of areas but my area of interest being house prices. If the housing market suffers that is a really big indicator of the UK recession. I would wager the Bank of England would then look to lower the Base Rate further should a recession hit.
If you are looking to buy, move or remortgage then discuss with a broker your circumstances so that you can make an informed decision. Happy New Year everyone!