02 Aug What the base rate reduction means for you

By Christopher Collins at My Mortgage Brokers

The Bank of England Base Rate has reduced and so are mortgage rates! Many lenders have already been lowering their fixed rates to compete for new business and it’s great to see some rates as low as 3.99% again. Mortgage rates still remain higher than borrowers had enjoyed prior to the surge in 2022, but the rates today are far more palatable than they were this time twelve months ago when the average two year fixed rate was 6.86% according to Moneyfacts.

What happens next? The Bank of England raises and lowers interest rates in an attempt to keep inflation as close to its 2% target as possible. Inflation has now been at that target for two months in a row. However, the Monetary Policy Committee (MPC) knows that changing rates now won’t change inflation for some time to come and takes time to filter through to prices. Rachel Reeves’ recent announcement for public sector pay rises (many of which are well deserved and a catch up for reduced pay caused by wages not rising in line with inflation) could contribute to a short-term increase in inflation and slow down how quickly the MPC will reduce the Base Rate. Economists are forecasting that there will be one or two interest rate cuts this year from the current 5.25% level to as low as 4.75% by the end of this year. We have now had one of those reductions today and is a step in the right direction for borrowers.

Fixed rate mortgages are priced based on the “swap rates” (not the Bank of England Base Rate), which is when two parties swap interest rate payments for another. In the case of mortgages, it is what lenders pay to financial institutions to acquire fixed funding for a set period of time. They can be on a number of terms, including one, two, three, five and ten-year terms and the cost is used to price fixed rate mortgage products. Swap Rates are based on what the markets think interest rates will be; if the Swap Rates rise then mortgage lenders will increase their pricing to maintain their profit margin. Now that the Swap Rates have recently been reducing, this has reflected in the fixed rates reducing. When the Bank of England Base Rate falls, a tracker mortgage without early repayment charges can put borrowers in a position to take advantage and give a lot of flexibility; however, it can also leave people vulnerable to any unexpected future base rate hikes. On the flip side, choosing what length to fix for depends on what you think will happen to interest rates during that time and what your personal circumstances are. They will almost inevitably carry early repayment charges meaning you’ll be limited as to how much you can overpay or potentially pay thousands of pounds in exit fees if you opt to leave before your initial fixed rate deal expires. Whatever the right type of mortgage for your circumstances, shopping around and speaking to a good mortgage broker is a wise move.