Although financial markets have been anticipating that the Bank of England will begin reducing interest rates this summer, potentially lowering the benchmark rate to 4.5% by year-end, the latest ONS data may keep pressure on the BoE to hold steady on rates. The rate drop expectation had led lenders to offer more competitive deals, although many households still face increased payments as their fixed-rate contracts expire.
“The BoE will be incredibly cautious to cut rates at a period when spending power is high for consumers and potentially triggering a fresh inflationary bout. As such, today’s data will continue to put a dampener on a rate cut in June or August, with November remaining the likeliest date to see that first fall,” Richard Carter, head of fixed interest research at Quilter Cheviot told IFA magazine.
As of February, the average two-year mortgage rate for a 60% loan-to-value ratio stood at 4.62%, down from a peak of 6.22% last July but still significantly higher than the 1.29% average in 2020 and 2021 when rates were at 0.1%.
The current level of home loan arrears remains below the levels seen during the 2008-09 financial crisis, thanks in part to a strong labor market and better mortgage regulations. Recent research by the Bank of England highlighted that most borrowers whose fixed deals ended in 2023 were offered rates below those for which they were initially tested.
The data also revealed a decline in buy-to-let mortgage advances, which dropped by 4.9 percentage points year-on-year to 7% in the final quarter, the lowest since 2010. Pundits have attributed this to multiple changes in the buy-to-let tax landscape, making it less appealing for landlords. Upcoming changes to holiday let rules could exacerbate the situation further.