The Monetary Policy Committee voted by a majority of 7-2 to raise base rate by 75 basis points to 3 per cent this month, the biggest rate hike since 1989. However, it could have been much worse. With the markets previously factoring in a greater rate rise following the disastrous mini-Budget. Thankfully, the appointment of Rishi Sunak and reversal of many of Kwasi Kwarteng’s measures has led to a calming down of the market. Indeed, the Bank of England said that the peak in interest rates that was originally priced in by the financial markets – 5.25 per cent. May be too high and a peak of 4.75 per cent was now more realistic.
While 4.75 per cent is still rather higher than where rates are today, even that may not be necessary if inflation – currently 10.1 per cent. Drops back to the Bank’s target of 2 per cent more quickly than forecast. While further rate rises are expected, the pace of hikes may ease, with Schroders forecasting a peak of 4 per cent in bank rate.
The usual consequence of a base rate rise is that fixed-rate mortgage pricing also increases but unusually this was not the case this time around. This is because fixed-rate mortgages have soared in recent weeks on the back of Swap rate volatility. This has now calmed considerably, with two-year Swaps falling by more than 100 basis points in the past month. Subsequently, fixed-rate mortgages have been edging downwards in recent days and are expected to continue to do so. Indeed, Clydesdale is just one lender to reduce its fixed-rate mortgages after the base rate increase, with others expected to follow.
According to Moneyfacts, the average two-year fix fell 3 basis points to 6.45 per cent this week. While the average three-year fix dropped by 2 basis points to 6.74 per cent. It is important to remember that these are average rates and there may be cheaper ones available, depending on your loan-to-value (LTV). These rates are also much higher than borrowers have got used to paying in recent years.
All of this makes choosing your next mortgage more difficult. If you need the certainty of a fixed rate to help with budgeting, they are still very expensive. Some borrowers are opting for tracker or variable rate deals with no early repayment charges as these are comparatively much cheaper and will continue to be so for a while. Even if there are further base rate rises. The idea is that they can then switch to a fix once pricing settles down further.
With many borrowers taking out fixed-rate mortgages in recent years, they will be protected from rate rises – for now. Those on variable-rate mortgages will see their monthly payments go up those on base-rate trackers will see the full rate rise passed on while those on variable rates linked to their lender’s standard variable rate will need to wait and see whether their lender decides to pass on the full extent of the rate rise or not.
Below we answer some of clients’ most common questions about the mortgage and housing markets:
Should I take out a fixed-rate mortgage?
A If you need certainty to help with budgeting and would struggle to pay your mortgage. If rates were to rise further, then a fixed-rate mortgage makes sense. The problem is that they are still pretty expensive at the moment, following the turmoil of the mini-Budget, even though rates are starting to edge down. If you can sit it out and wait a while for rates to fall further, perhaps going onto your lender’s standard variable rate for a short while in the meantime, this might make more financial sense in the long run. Ask a whole-of-market broker such as AWS Private Finance as to what they would advise for your particular circumstances.
Are variable rates a good option at the moment?
A Comparatively, yes. Many clients are opting for variable-rate deals with no early repayment charges because they are cheaper. At least initially, and will be so even after a few further modest rate rises. The plan is for these borrowers to move onto a fixed rate once pricing settles a little. Also, if interest rates don’t rise by as much as previously feared, variable rates will look even better value.
I am coming up to remortgage in the spring – should I be doing anything now?
A Yes, plan ahead as much as possible. You can book a new rate up to six months before you need it so again. Speak to a whole-of-market broker such as AWS Private Finance to find out the best deals available to you. They will also help you with the application process.
Is a house price crash on the cards?
A House price growth has been stellar in the past couple of years but it is undoubtedly slowing down with Nationwide reporting that prices fell for the first time in a year in October, with a 0.9 per cent month-on-month drop. However, given that prices have risen by just under 10 per cent in the past year. According to Halifax, even the 10 per cent crash that many are predicting will take us back to where we were a year ago. It is more likely to be a market correction than a price crash.
Do I need to worry about negative equity?
A Negative equity, when your outstanding mortgage is greater than your property value, is only really an issue. If you are looking to move or remortgage. So, if you buy a property for the medium- to long-term then you should be able to ride out any price falls over time, and hopefully see your property ultimately rise in value. If you can avoid taking out a high LTV mortgage. Then you should reduce your chances of getting into negative equity.
Get in touch
In these highly uncertain times. It is more important than ever for borrowers to seek advice when taking out a mortgage. This is where AWS Private Finance can help. We are whole-of-market brokers who can help arrange the right mortgage for your circumstances. Please get in touch for more information.
