Mortgage rates will stay the same

Base rate rises to 4.25% but mortgage rates to stay at 4-4.75% for 2023

Interest rates rise again

Last week the Bank of England increased interest rates one more notch, from 4% to 4.25% this is the 11th consecutive rise in interest rates following the Inflation jump to 10.4% from 10.1% in January. Which was primarily caused by an increase in food prices and recent vegetable shortages, inflation isn’t falling as fast as some would have hoped. As a consequence, the Monetary Policy Committee made the decision to increase interest rates as inflation is way above the tolerance rate of 2%.

UK mortgage rates have been dropping back

There is a sense that base rate increases are coming to an end. Average mortgage rates have dropped back over the last 3 months from the highs seen at the end of 2022. Bank of England data shows the average 5-year fixed rate mortgage for a 75% loan to value (LTV) mortgage has dropped to 4.38% from a high of 5.6% last October.

What many borrowers will remember is the ultra-low 1.2% mortgage rates reached in September 2021. This was the low point, before rates started to increase over 2022 as inflationary pressures built up, as a result of the mini budget late last year.

Mortgage pricing is complex  

How banks set mortgage rates and there is not a fixed relationship between mortgage rates and the interest rates set by the Bank of England. It all depends on where banks get their funding from in order to lend money out as mortgages - and what this funding costs. They then add a margin onto this cost to reflect risk and a profit margin, which makes the mortgage rate. This is why higher loan to value mortgages attract slightly higher mortgage rates, as there is more risk lending at 90% LTV than say, a 50% LTV mortgage.

Banks use savings from depositors such as households and companies to turn into loans. Current accounts also add to the funding pool. Banks also secure funding for mortgages from the money markets. They can access fixed rate money for 2 or 5 years or longer. The cost of this money is called the SWAP rate - the cost of swapping variable rate money to fixed money for a defined period. The price of this fixed rate finance will be influenced by where markets believe interest rates will go over the period the money is secured for.

While base rates might go up in the short term, if the view is that inflation will slow quickly and interest rates will fall then this may result in SWAP rates being lower than base rates. The 5 year UK SWAP rate is currently 4% and has fallen back from a high of 5.3% last year. Banks will use a blend of sources as they price mortgages and this means an increase in interest rates doesn't necessarily flow into the cost of new mortgages. Borrowers on variable rate mortgages, where the cost is linked to the base rate, will see mortgage rates increase as the Bank of England raises rates. But for the majority on fixed rate loans there will be no change.

Mortgage rates likely to hold where they are for much of 2023

We expect mortgage rates for new business to sit between 4% and 4.75% for much of 2023. This is low by historic standards but means the average buyer will face an increase of £200 to £500-a-month more in mortgage repayments than at the start of 2022, when mortgage rates were much lower. We don't expect the increase in the base rate to make much difference to the outlook for the housing market. Demand for homes is down on last year but sales are still being agreed, albeit at a slower rate (20% lower).

People still want to move and households are resetting their plans in an environment of higher borrowing costs. Talk of a big price correction in home values has been overplayed and if you price your home sensibly, it’s likely to attract interest subject to some negotiation on the final price.

Mortgage Fixed & Variable Rate holders

Whilst many mortgage holders will be protected there is an increasing number approximately 1.36m whose fixed rate mortgages have already expired or are due to expire this year. The base rate rise of another 25 points won't help those borrowers with already big monthly mortgage payments representing a big squeeze on their finances. In addition, it won't help landlords whose profit margins are being squeezed to the point that running their buy to let is no longer proving profitable.

We are registering many tenants who are having to move because their landlord cannot afford the higher mortgage rates and need to sell. The other group who will be feeling the pinch, on their household finances are the estimated 1.65m borrowers on variable rate mortgages. This group may want to sell, so their short term higher monthly mortgage payments maybe offset when it comes to turning their equity into cash. This group may also be looking to hold fire, in the hope that inflation reduces and they can select a lower longer term fixed rate than what is available now.

Price Your Home Sensibly

Sensible pricing is so important for a number of reasons. Unrealistic pricing will put off potential buyers in the first place – meaning you miss out on the spike of interest when a property first goes on the market. If you then need to reduce the price, buyers will know that you have been on the market for some time and will be more desperate to sell – so your bargaining power reduces too.

If you would like to sell your home now or in the future we would be pleased to provide you with our professional opinion just give us a call on: 0208 870 5800 or email: valuations@letsfindahome.co.uk for a no obligation market appraisal.