Why are mortgage rates falling, & should you fix now? Or could rates fall further?
Falling mortgage rates have made headlines in the last week, as there is renewed hope that 1.5 million homeowners who are about to see their previous deals end can re-mortgage at rates much below what they previously thought. Mortgage market competition was bound to heat up at the start of the new year as better-than-expected inflation data in December meant that markets are now pricing in the Bank of England’s (BOE) base rate to be cut five times this year.
Some might wonder how mortgage rates could fall despite the BOE announcing no cuts to its base rate. That is because banks lend each other money on what is known as the SWAP rate. SWAP rates are based on market sentiment and the future expectations for the base rate to be in one, two- or five-years’ time. The current SWAP rates for two years and five years are 4.15% and 3.51%, respectively. The cheapest 2-year fix for 60% LTV is at 4.17% with Barclays, and a 5-year fix at 3.89% with Santander. Which highlights the slender margins the banks are operating at to gain business.
Banks are eager to win business in the new year as the mortgage lending agreed by banks in 2023 fell by 41.4%, dropping to £51.5bn. New statistics also showed a weakening in the Buy-to-Let lending. A positive inflation outlook, falling SWAP rates and lack of business last year resulted in a price war between Britain’s biggest mortgage lenders. The average five-year fixed mortgage rate is now 4.86%, down from a peak of 6.11% in July.
Should you fix now?
As I highlighted above, the lenders are operating at very slender margins, and it could take one set of data for the SWAP rates to start moving upwards and banks to start withdrawing their cheapest deals as they no longer become viable. It is also important to note that the cheapest fixed-rate deals are for those homeowners with equity of 40% or over; the deals for those with smaller deposits are yet to see mortgage rates fall below 4%.
Nonetheless, Rightmove has recorded nine of its ten busiest days for buyers getting a mortgage in principle to find out how much they can afford using the latest rates. Sellers are also sensing a turnaround, and the average asking price on Rightmove, the property portal, has risen by £4,571, the biggest December-to-January increase since 2020. The website also reported that the number of new properties for sale is 15% higher than a year ago, and the number of sales completed is 20% higher.
Suppose you are among the 1.5 million homeowners whose fixed rate is ending this year. Thankfully, the mortgage rates already look very attractive, especially for those with high equity levels. However, there is no guarantee that rates will continue to fall as lower rates bring back customers. Once banks have reached their appetitive for attracting business based on volume, they could start to push rates up to increase their margins. Everyone needs to understand their financial situation before fixing a rate; this is where a good mortgage broker would stand you in good stead.
Could rates fall further?
Some economists now predict the BOE to meet its inflation target of 2% by April because of falling energy and fuel prices. One economist, Julian Jessop, an independent economist at the Institute of Economic Affairs think-tank, thinks there’s a significant possibility that inflation will go sub-zero, which seemed incredibly unlikely a year ago when inflation was running in double digits. He believes there is “now” a good chance of deflation or at least a prolonged period of the Consumer Price Index (CPI) remaining below target. Deutsche Bank suggested that inflation will be 2.5% this year, on average, perhaps dipping below the target level slightly in April and May and then hovering around 2% to 2.5% for the rest of the year.
If what some economists say transpires, then the BOE will have no option but to start cutting its base rate. However, by how much remains to be seen and will depend on the inflation and unemployment data over Q1 in 2024. SWAP rates are already factoring in the base rate cuts, so a slight decrease in the base rate should not influence SWAP rates much further. It will take significant falls in inflation for the base rate to fall substantially and for banks to start offering sub 3 % rates.