The Bank of England announced a long-awaited cut to the base rate in August, with lenders subsequently confirming cuts to variable rate mortgages.
Fixed mortgage rates have also been lowered following the monetary policy committee meeting.
TSB, for example, announced reductions to certain residential fixed rates of up to 0.20 percentage points the day after the base rate was cut. Virgin Money similarly reduced some residential fixed rates by up to 0.19 per cent on August 8, followed by more fixed rate cuts on August 13.
But the 0.25 percentage point cut to the base rate had effectively already been priced into the market, says Jeremy Duncombe, managing director at Accord Mortgages.
“You saw quite a bit of movement in swap rates leading up to the base rate cut, rather than on the day itself,” he adds. “What’s happened since then is the direction that’s been given by the Bank of England. It’s often the commentary that has the most impact on what happens to fixed rates.
“Swaps move around quite drastically sometimes, irrespective of whether base rate has gone up or down, or stayed the same. Swap rates are a sentiment of where the market feels that base rate will go over the next two years on a two-year fix, and over the next five years on a five-year fixed.
“If the market thinks that base rate is going to drop, then you see a pass through into swap rates quite quickly. Fixed rates had been dropping for about two weeks before the base rate came down a quarter of a percent.”
Indeed, before the base rate cut was announced, some lenders were already reducing fixed rates.
Among those was Accord Mortgages, which announced shortly before the base rate cut that it would reduce rates the following day (August 2) by up to 0.25 percentage points on products up to 90 per cent loan-to-value, marking its fourth reduction in the space of a month.
MPowered Mortgages, another intermediary-only lender, also cut fixed rate mortgages the day before the base rate was cut on August 1. The lender followed with more fixed rate reductions of up to 0.37 percentage points on August 5.
“In the build-up to the rate cut, the swap curve had been gradually moving down for a few days,” says Peter Stimson, head of product at MPowered Mortgages.
“So in the lead up to the BoE cut, there had been a gradual reduction in swap rates, so there was some room for us to move rates downwards.
“It was also an anticipation; we thought that the BoE were going to cut. If it didn’t cut in August, we were fairly certain they were going to cut in September. So there was an anticipation from our side that they were going to cut rates.”
Figures from Moneyfacts likewise show that while the base rate remained at 5.25 per cent since August 3 2023 before being reduced to 5 per cent on August 1, average fixed mortgage rates fell by up to 1.08 percentage points year-on-year and 0.18 percentage points month-on-month.
Average fixed mortgage rates
|
Aug-23 |
Jul-24 |
Aug-24 |
|
|
Two-year fixed |
6.85% |
5.95% |
5.77% |
|
Five-year fixed |
6.37% |
5.53% |
5.38% |
|
10-year fixed |
5.89% |
6.01% |
5.93% |
|
Source: Moneyfactscompare.co.uk. Average rates shown are as at the first available day of the month |
|||
How weak US jobs data also brought UK mortgage rates down
Nevertheless, mortgage lenders have been reducing fixed rates after the MPC’s vote to lower the base rate, despite the decision already having been priced in.
Rates went down quite quickly following the BoE’s cut, says Stimson, but he adds this was more a result of US jobs data that was published on August 2.
Total nonfarm payroll employment edged up by 114,000 in July, below the consensus forecast of 175,000, while the unemployment rate rose by 0.2 percentage points to 4.3 per cent, contributing to concerns about a potential US recession.
“Swap rates have rebounded slightly,” says Stimson. “How much rates ultimately come down is really going to depend on where inflation goes over the next few months, and really what happens on a global level.
“It’s only if events that aren’t really anticipated start occurring that we’re going to start seeing probably more significant cuts in fixed rates. Several rate cuts over the next two years have already been priced into the curve, and the same on the five-year curve.”
Duncombe at Accord Mortgages agrees that “pessimistic” data from the US that contributed to concerns about a potential US recession drove swap rates down more than the base rate cut.
“We saw the stock market drop; we heard talk of a US recession. Swap rates came down quite drastically.
“And that’s what you’re seeing play out in lenders starting to cut their rates, because on the five-year funding swaps have dropped well below 4 per cent. So you’re seeing fixed rates come in at well below 4 per cent, even though the base rate is still at 5 per cent.
“What has happened from the context of [August 6] is that swaps have gone back up by about six basis points, because people are thinking, ‘Actually, we probably overreacted, and we need to come back a little bit.’
“And you saw that a couple of weeks ago when swaps went up by six basis points in a day, because the government had talked about giving nurses a 5.5 per cent pay rise when inflation is at 2 per cent. There’s lots of things that can impact fixed rate pricing outside base rates.”
How far could mortgage rates continue to fall?
With future base rate cuts already priced into the swap curve, Stimson says: “Don’t expect that the next time as and when the base rate gets cut, that cut’s immediately going to be reflected in pricing, because it won’t necessarily be the case.”
When it comes to fixed mortgage rates, Nationwide chief economist Robert Gardner likewise says they depend on what happens to movements in longer-term interest rates, which is mostly determined by expectations around the base rate in the future.
“If nothing changes on that front, if people’s expectations of bank rate over the next two to five years remain unchanged, then bank rate reductions will only have a very modest effect on mortgage rates, other things equal,” Gardner says.
“So the main thing is what happens to expectations of bank rate. And if expectations don’t move significantly, then the bank rate reductions themselves will have only a modest impact on mortgage rates in terms of fixed rate mortgages.”
Duncombe says the long-term expectation is that rates will continue to fall, albeit not significantly.
“There isn’t a smooth glide path towards lower rates; there will be bumps,” he says. “It’s very likely that at some point rates will nudge back up again.
“The long-term expectation is that rates will continue to fall slightly from where they are now. However, most of the expectations of where the base rate will go have already been factored into the fixed rates that people are paying today.
“It’s likely that at some point, fixed rates will nudge back up again. But the long-term expectation is that rates will fall somewhat, but not significantly, from where they are today.”
Chloe Cheung is a senior features writer at FT Adviser