Bank of England and Spring Budget

Interest rates and mortgages have remained front and centre during early-2023, with the Bank of England announcing its eleventh consecutive interest rate rise this week. Bank of England Base Rate now sits at 4.25% – the highest it’s been in over 14 years. Earlier this month, The Spring Budget announcement confirmed the Office for Budget Responsibility (OBR) has forecast the UK will not enter a recession with this year. The Bank of England have supported this and stated the UK economy is performing better than expected.

Before looking ahead, it’s worth recapping events leading up to where we are today. After a period of historically low interest rates, 2022 saw interest rates steadily and consistently rise. Inflationary pressure caused by the economic effects of the Covid-19 pandemic and the War in Ukraine led the Bank of England to begin increasing interest rates. The aim was, and still is, to slow the rate of inflation. The “mini-budget” of late-2022 aimed to grow the economy regardless of current global events. The response across financial markets displayed a severe lack of confidence in the plan and this was no more evident than in the mortgage market. Fixed rate mortgages increased significantly with many lenders temporarily withdrawing from the market. Over the period since, fixed rate mortgages have steadily and consistently fallen, albeit they are still significantly higher than they were in early-2022.

According to data published this week from This is Money, the average two-year fixed rate mortgage is now 5.32%, with the average five-year fixed rate mortgage at 5%. In comparison, in March 2022, the average two-year fixed rate mortgage was 2.65%, with the average five-year fixed rate mortgage at 2.88%.

Fixed rate mortgages are largely determined by swap rates. An interest rate swap is a necessary component for mortgage lenders to mitigate the risk in offering fixed rate mortgages. Swap rates themselves are based on market sentiment over the term of the swap (eg: two-year fixed, five-year fixed). Interest rates available on fixed rate mortgages will increase or decrease in line with changes in swap rates to ensure they remain profitable and competitive for the mortgage lender.

Variable rate mortgages, including tracker and discount rates, are different to fixed rate mortgages. Tracker rate mortgages are directly linked to the Bank of England Base Rate. Lenders apply a margin on top of base rate and the interest rate charged moves up and down according to changes in base rate. Discount rate mortgages are determined by the lender’s own standard variable rate (SVR). While this does not directly correlate with base rate, it generally moves changes in a similar fashion.

Looking ahead, uncertainty is the only certainty in the current mortgage market. Fixed rate mortgages have begun to plateau after a period in which they have steadily decreased. Further decreases are expected however it’s commonly accepted that the days of 1% mortgages rates will not return for the foreseeable future. Most forecasts were predicting the latest Bank of England Base Rate rise to be the last. However, with inflation rising again and a recession no longer forecast, further rises may be considered if inflation does not begin to fall as the OBR have predicted. Collapses and takeovers of major banks outside the UK will likely have ripple effects into UK markets too.

While those on fixed rate mortgages are currently protected from increased rates, this only lasts until the fixed rate period comes to an end and a remortgage is needed.  Homeowners do have options if new mortgage payments are no longer affordable – exploring all possibilities is paramount. In the current market, securing a new rate as soon as possible, six months before the current rate expires, is advisable. If better rates become available between now and when the remortgage goes through, these can be taken advantage of too. If you’re approaching your remortgage, looking to buy your first home or have any other mortgage and life insurance queries, get in touch and speak to one of our professional advisors.