In November, the Bank of England (BoE) reduced the base rate for the second time in three months. Since August, the cost of borrowing has fallen from 5.25% to 4.75%, with further cuts expected in 2025.
However, you may be surprised to learn that, while the base rate is falling, the cost of mortgages has actually risen in recent weeks.
Analysts Moneyfacts report that the average two-year deal rose from 5.40% to 5.44% in mid-November, while a five-year mortgage increased by 0.05 percentage points to 5.17% in the same period.
The Guardian also reports that many high street lenders have increased the rates available on their mortgage deals, with Barclays increasing some fixed-rate deals by as much as 0.56 percentage points.
So, why are mortgage rates rising when the base rate is coming down? Read on to find out.
The base rate is often used to help control inflation
On 7 November, the BoE cut the base rate from 5% to 4.75%. This had been widely anticipated, with the Office for National Statistics (ONS) reporting that inflation had fallen to 1.7% – below the target of 2% – in the year to September 2024.
When inflation is high, the BoE often increases the base rate – as in 2022 and 2023 – to slow demand for goods and services and help to push down prices. When inflation is low, the reverse happens.
However, as the cut had been predicted, the markets had already factored the reduction into their calculations. In other words, it was so likely to happen that lenders had already adjusted borrowing costs accordingly.
“Swap rates” – the rates at which lenders exchange fixed interest payments for variable ones to manage the risks of long-term borrowing – usually rise and fall in line with expected changes to the base rate. This means anticipated changes are already “priced in” well before any official bank rate cut.
So, when the BoE cuts the base rate, mortgage rates might stay the same or even rise if other factors, such as the future prediction for inflation or funding costs, shift unfavourably.
This is essentially what has happened in recent weeks.
Inflation has once again risen above the 2% target – the ONS says that it was 2.3% in the year to October 2024 – potentially slowing the pace of interest rate reductions.
When pricing the cost of mortgages, lenders don’t just look at the current base rate – they must take a longer-term view.
Robert Gardner of Nationwide says: “When setting rates for a five-year fixed-rate mortgage, lenders are already incorporating what they expect average rates to be over the next five years.
“Consequently, if a lender believes the base rate will remain higher over the long term than was previously predicted, this can push the cost of mortgages up.”
Could the Budget be to blame for higher mortgage costs?
As you read above, the path of interest rates is closely linked to inflation. Broadly speaking, if inflation is under control, interest rates will fall and if inflation is above target, they could remain higher.
In the 2024 Autumn Budget, the chancellor announced a £70 billion increase in public spending, designed to invest in infrastructure and support public services.
Many economists say that this boost in government spending will increase the forecast for inflation, meaning it’s more likely that interest rates will stay higher for longer.
James Smith, a research director at the Resolution Foundation, says: “It’s a big loosening, and that will come with faster growth, higher inflation and higher interest rates.”
Donald Trump’s election as president could also affect the cost of mortgages in 2025.
The incoming president has pledged to introduce significant tariffs on imported goods. During his campaign, he threatened to add a 10% to 20% tariff on all imports, with tariffs of 60% on imports from China.
These tariffs could mean exporters from the UK find it more difficult to sell their goods and services in the US, impeding economic growth.
Lenders may also withdraw competitive rates to manage capacity
Reuters recently reported that UK mortgage approvals have hit their highest level in two years, while the Royal Institution of Chartered Surveyors said house prices, sales, and enquiries all rose in September 2024.
When banks and building societies offer competitive mortgage deals, they often receive a significant amount of business in a short period. Many set a limit on the number of loans they are willing to offer at those rates.
Once a lender reaches that limit or starts to have capacity issues with processing loans, they may withdraw their deals or increase their rates to dampen demand.
In a busy mortgage market, this can be another factor that contributes to a rise in borrowing costs.
It is one of the key benefits of working with a broker when you apply for a home loan. We have excellent relationships with many lenders and can often “reserve” rates before they are withdrawn, helping you to secure the deal you want before a lender takes it off the market.
We can also ensure that we find a lender who can process your application within your desired timescale. This can be crucial if you’re in a race against time to secure a property or you need a mortgage offer quickly.
Get in touch
If you’d like help in finding the right mortgage deal for you in this tricky market, please get in touch. Email [email protected] or call us on +44 (0) 20 3411 0079.
Please note
This article is for general information only and does not constitute advice. The information is aimed at retail clients only.
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