Written by Tim Leonard, mortgage and personal finance expert at NerdWallet UK
The unexpected news that inflation in the UK held steady in September has led to predictions that the recent trend of falling mortgage rates may slow down.
The cost of fixed-rate mortgage deals has fallen consistently since the end of July, triggered by a larger-than-expected drop in Consumer Prices Index (CPI) inflation in June. This was taken as a sign by lenders that the Bank of England’s remedy of relentless base rate rises was beginning to bring inflation under control. In turn, it was thought the rate hike cycle wouldn’t need to be as severe or prolonged as originally thought.
However, the latest CPI data has revealed that inflation held firm at 6.7% in September, rather than dropping slightly as economists were expecting. Some financial commentators believe it could create wariness among lenders who have become accustomed to making notable mortgage rate reductions.
Fixed mortgage rates continue to fall, but progress towards pre–April rates is likely to stall
The better news for those watching fixed-rate mortgages is that rates continued to head lower in October, as was predicted in our previous mortgage rate forecast. It also means fixed rates generally have now been falling for the past three months.
Latest Rightmove data shows the average rate on a five-year fixed-rate deal at 60% loan to value was 4.98% on 17 October, compared to the recent high of 5.90% seen towards the end of July – a saving of more than £4,000 over the five-year fixed-rate deal on a £125,000 mortgage.
However, the disappointment for borrowers is that similar deals were priced at an average rate of 4.12% as recently as the end of April. If a slowdown in rate cuts is on the cards, progress back towards similar levels is likely to stall too.
Base rate may hold firm amongst wage growth and conflict uncertainty
Even though the latest inflation figures came in higher than predicted, many feel it won’t be enough to persuade the Bank of England’s Monetary Policy Committee (MPC) to raise the base rate at the next announcement on 2 November. If the rate is left unchanged, it would be the second hold in a row, and offer further respite for borrowers with tracker mortgages and other variable rate deals who had seen their monthly repayments soar after the rate steadily increased 14 times in a row.
The latest official wage growth data, another economic indicator closely watched by rate setters, also appeared to give MPC members little reason to consider resuming with rate increases in November. The uncertainty created by the Israel-Hamas conflict, and the need to allow the full impact of previous base rate rises to filter through to the economy, should also come into the Bank’s thinking.
