Experts suggest that the recent uptick in inflation is unlikely to disrupt the current trend of lenders cutting mortgage rates.Â
Inflation has risen to 2.2% for the 12 months ending in July, up from 2% the previous month, according to the latest data from the Office for National Statistics (ONS). Although this increase pushes inflation above the Bank of England’s target of 2%, it was lower than the 2.3% rise that many in the market had predicted. Despite this, the modest increase in inflation is not expected to have a significant impact on the trend of lowering mortgage rates.
The Bank of England lowered the base rate on 1 August, driven in part by inflation remaining steady at 2% for two consecutive months. This stability in inflation has contributed to the decision to cut the base rate.
In response to these changes, mortgage lenders have been reducing their rates, expecting a continued downward movement in interest rates. As a result, several lenders have started offering five-year fixed mortgage rates below 4%. Notable examples include Barclays, NatWest, Nationwide, and HSBC. This trend reflects the current market’s optimism about falling interest rates and provides potential borrowers with more competitive mortgage options.
On 1 August, the Bank of England decided to lower the base rate, a move influenced by inflation maintaining a steady 2% for two consecutive months. This consistent inflation level played a significant role in the Bank’s decision to reduce the rate, aiming to support economic stability.
In response to this rate cut, mortgage lenders have begun adjusting their rates downward, reflecting their expectations of a continued decline in overall interest rates. Consequently, several prominent lenders, such as Barclays, NatWest, Nationwide, and HSBC, have introduced five-year fixed mortgage rates below 4%. This shift in the market indicates a broader expectation of decreasing interest rates, offering borrowers more attractive and competitive mortgage options. This development provides a potentially beneficial opportunity for those looking to secure a mortgage under more favourable terms.
What next for mortgage rates?
The current mortgage rate competition has been intense. Since early July, the lowest five-year fixed rate has dropped from 4.28% to 3.83%, while the lowest two-year fixed rate has decreased from 4.68% to 4.22%.
David Hollingworth, an associate director at L&C Mortgages, believes that the recent rise in inflation is unlikely to affect mortgage rates significantly. He notes that the increase was anticipated, so the market has already factored it in.
Hollingworth expects that the trend of frequent adjustments in mortgage rates will continue as lenders strive to offer better deals. Mark Harris, chief executive of mortgage broker SPF Private Clients, shares Hollingworth’s view on the matter.
Mark Harris commented that the smaller-than-expected rise in inflation is unlikely to disrupt the Bank of England’s plans to lower interest rates. He noted that the markets are anticipating two additional rate cuts this year.
Harris added that the recent rate cut, the first since the pandemic, has been positively received and signals that interest rates have likely peaked and are expected to decrease further. The pace of these reductions will depend on economic conditions and inflation.
Stimson from MPowered shares the view that the impact on mortgage rates will be minimal, though he acknowledges that the rate cuts may soon come to an end.
Stimson remarked that the level of competition among lenders is the most intense he has seen in his 30 years in the industry. He noted that despite the recent rise in inflation, mortgage rates are unlikely to be affected, as this increase has already been factored into pricing.
He explained that swap rates, which lenders use to set fixed-rate mortgages, dropped significantly following this month’s base rate cut. They fell further due to weak non-farm payroll data and concerns about a US recession. However, swap rates have risen over the past week, which is expected to stabilise mortgage rates at their current levels for now.
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