Following a period of high mortgage interest rates, we are now entering a cycle where rates are starting to fall – see chart below. These falls have happened despite the Bank of England Base Rate remaining at 5.25%. But why is this?
Rate falls
Lenders vary their fixed rates due to expectations around base rate movements (via the money markets) and to reflect business volumes. The start of the year is notoriously quiet, and so lenders tend to cut their margins to try and get business in. Early January saw a number of lenders continue to cut interest rates, with a string of household names following suit.
What does this mean for borrowers?
This is good news for borrowers, with rates now better than a few months ago. The likelihood is that rates will continue to improve in the coming months. Some would-be borrowers may be tempted to wait and see if rates are reduced further, but this can be counterproductive. A mortgage takes time to complete, and a good mortgage broker will monitor rates during the application process, up to the point of completion. If the rate improves, they will switch you over to a cheaper rate, even if you’d locked in a higher rate initially.
Lower rates can also have a knock-on effect on the housing market. Lenders can be more generous on affordability in a falling rate environment, which may allow those who were priced out of a property purchase back into the market. However, this can lead to increased activity, which in turn can raise property prices (or at least stop the slide in prices).
Remortgaging in a falling rate environment
If you are not moving home, but your current rate is ending soon, much of this still applies. Securing a rate as soon as possible is still a good idea, in case the market changes and rates go up. But as with those looking to move home, a good broker will still switch you over to a cheaper deal before completion if the initial rate falls. A 0.5% rate improvement on a £300,000 mortgage could save about £1,500 a year in interest rate costs.
Want to find out more? Get in touch with our in-house mortgage experts by calling 03300 564 446, or using our contact form. Alternatively, you can sign up to our Mortgage Renewal Register. Sign up (for free) and we will be in touch closer to the time to help find you the best deal for your specific circumstances.
This article is for general information purposes only and does not constitute financial advice or a personal recommendation. Your home or property may be repossessed if you do not keep up repayments on your mortgage. Mortgage availability and terms depend on your individual circumstances and are subject to lender criteria.
