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UK Interest Rates: The Current State of Play

Any discussion around the UK property market - whether it be with prospective buyers or current owners - will inevitably lead to a conversation around mortgage rates. Whereas for the past decade the interest rate environment has provided a relatively static, calm backdrop to the property market, today, amidst significantly greater rate volatility, it is the first and most fundamental subject to be addressed.

Approaching this topic head on then, we examine here where mortgage rates are currently, placing this in a historical context, whilst also hypothesising where they are likely to go in the future.

The Short-Term Perspective: Unprecedented Highs

When the Bank of England voted in August to increase the base rate for the 14th consecutive time, it took the rate to 5.25% - the highest it has been since February 2008. This 15-year period has been characterised by unprecedentedly low rates, with 12 years of sub-1% rates, bookended first by a sharp fall in rates, and then recently, a sharp, consistent period of growth.

Whilst inevitably this has led to a sharp rise in the interest charged by mortgage lenders, the trend has not been as consistent. Importantly, whilst lender’s variable rates typically track the base rate and therefore mirror it’s rises and falls, fixed rates are based on forecasts for the future direction of the BoE rate. In turn then, over the past 12 months we have seen periods of relative optimism and pessimism, beginning with a sharp, reactionary rise in fixed rates following last November’s ill-fated budgement announcements. Since this time, whilst the base rate has continued to rise, predictions of it’s peak have not, closely linked to monthly inflationary data. We have therefore seen a subsequent period of shallow increases and decreases, rising at their peak to an average of over 6%, compared to the average today of 5.5%, with the recent re-introduction of a few sub-5% options.

Also of note, particularly for non-resident lenders, is the shrinking of the margin between the Bank of England base rate and the rate charged by lenders. When the base rate stood at sub-1%, lenders were well aware that there was sufficient demand in the market for them to maintain relatively significant levels of interest themselves, culminating in buy-to-let rates around the 3-4% mark. Now, lenders have been forced to price their rates more competitively and lower their own margins to attract business. This means that, despite the base rate increasing 5.15%, interest rates on average have only risen by around 2%.

A Longer-Term Perspective: A Return to Normal

There is, however, an alternative view on the current state of the mortgage market, and which stance one takes is determined heavily by the timeframe adopted as the point of reference. Particularly for a younger generation of borrowers, the last 10 to 15 years is all they have known, and so they are heavily accustomed to extremely low interest rates.

However, for an older generation, it is the past 10 to 15 years themselves which are the anomaly, rather than the rates we see today. This can be easily demonstrated by charting the base rate over a longer time period.

There is a great deal of focus currently on inflation, and indeed it is exceeding the government’s 2% annual target by a considerable margin. However, the rate of inflation is still significantly lower than it was during the 1970s, when wage growth and oil prices saw sharp inclines. The same can be said for the early 90s, when there was considerable pressure on the value of the pound, leading the government again to introduce a 15% base rate.

Taking that as a reference point, then, whilst some point to today’s rates as a burden to buying, others still see rates as lower than what they are accustomed to – a key factor in the property market’s current resilience.

Where are Rates Likely to Go?

For the first time since December 2021, the Bank of England chose not to raise the base rate further at September’s committee meeting. With inflation slowing but remaining stubbornly high, the debate now is whether the base rate has actually peaked, or whether the bank will feel compelled to raise rates once again following a small pause.

With jobs data weakening and inflation seemingly on a shallow decline, the base rate is predicted to remain at 5.25% in November. Beyond that, however, whether there are further increases depends heavily on whether inflation can continue to contract and start to approach the bank’s 2% target.

Whether the base rate rises again before peaking, however, it is unlikely to have a telling impact on rates in the short-term. This is because lenders have been forecasting a peak of 5.5% for several months, and so a rate increase to that level would likely be priced in already. Indeed, to the contrary, if the bank continues to maintain the rate at its current level, we are likely to see short-term falls in fixed rates.

In the longer term, there is a widespread consensus now that ultra-low rates of 1% or below are a thing of the past, and that we now entered a prolonged period of higher rates. Again though, placing this in the longer term trajectory of interest rates, this is really being seen as a return to normal, rather than a new, unprecedented phase.

Therefore, any further changes to the economy or political landscape aside, expect to see lender’s rates hover around the 5% mark into 2024 and potentially beyond. For buy-to-let investors, this stable rate landscape is likely to occur against a backdrop of continuously rising rents, therefore creating an increasingly positive position for landlords.

Looking further into the horizon, the Bank of England has made it clear that it does not want to keep rates unnecessarily high should it not need to, and that it won’t hesitate to lower rates down the line. Therefore, whilst rates are unlikely to approach anywhere close to 1% in the foreseeable future, nor is anything like previous highs of 15% expected, with a longer-term forecast showing rates converging around the 3 to 4% mark.

Working with UK-based brokers who give us access to the whole of the market, Tailor My Property are here to help you navigate through your mortgage or remortgage requirements as effectively and as efficiently as possible. We adopt a heavily hands-on approach from start to finish, from assessing affordability and obtaining in-principle decisions, to finalising preferred options, to assisting with the full applications themselves. If you have any questions around the current mortgage environment and how it applies to you, please don’t hesitate to get in touch.


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