Borrowers kept on hold by Bank rates decision

The Bank of England’s decision this week to hold interest rates has left many borrowers in limbo as to their best options for remortgaging, brokers and finance experts said.

With 1.6mn UK borrowers due to remortgage in 2024, many face a sharp rise in their monthly payments, with the cost of fixed-rate mortgages changing little in recent weeks. “Mortgage borrowers are left waiting once again for the cut to base rate,” said David Hollingworth, director at broker L&C.

In July 2021, the averages of the lowest remortgage two- and five-year fixed rates were 1.13 per cent and 1.24 per cent respectively. At the start of June they were 4.92 per cent and 4.50 per cent, L&C said. “[It’s] a strong reminder of how rapidly the market has changed,” Hollingworth said. 

Those who opted for a variable rate last year in expectation of rapid declines in the BoE rate are also left on their existing rates, which are substantially higher than those for fixed rates. Though inflation has fallen to within its target range of 2 per cent for the first time in three years, the BoE wants to ensure it remains under control before starting to cut rates. 

Sarah Coles, head of personal finance at Hargreaves Lansdown, said borrowers were still likely to see a cut in August or September and possibly more by the end of the year, “But that’s not going to move the dial anywhere near as much as they will have expected when they remortgaged on to a variable deal in the hope that rates would fall swiftly and often,” she said. 

A Bank rate cut would be rapidly reflected in the cost of variable rate deals, but the standard option of a fixed-rate mortgage would not be immediately affected , since lenders price these deals using future expectations of rates implied by market swap rates — which are already suggesting an August cut.

Lenders are also applying caution on their mortgage rates, since their margin against swap rates is “very tight” at the moment, says Simon Gammon, partner at broker Knight Frank Finance. “Whenever swap rates move, they haven’t really got much wriggle room to accept perhaps a slightly lower margin. Swap rates don’t need to move much before they’re under water.” 

An August cut may not make a substantial difference to fixed-rate costs, he added, but its impact on sentiment in the wider property market would be significant. “That first cut is psychologically important. It gives people confidence that we are actually turning the corner. People will think, OK, I reckon we’re there now. Mortgages will be getting cheaper. I might now invest, pull the trigger and buy that property.” 

Though the headline cost of fixed-rate mortgages will barely change, an August cut would also make it a little easier for borrowers to meet lenders’ affordability tests, said Lucian Cook, residential research director at estate agent Savills.

“In turn, that is likely to make the market progressively less dependent on the cash and equity-rich buyers, allowing those who have put off plans to trade up the housing ladder over the past two years to step back into the market.”