Despite mortgage interest rates rising above 6% last autumn in the aftermath of the government’s disastrous mini-budget, there is still good reason for cautious optimism.

Those closely monitoring the housing market may have observed a shift in trends. UK house prices have experienced a decline for four consecutive months, including a 1.5% decrease in December, following two and a half years of rapid growth.

Mortgage approvals have dropped to their lowest level since the onset of the pandemic. The primary cause of this trend is attributed to mortgage rates, which are impacting the affordability of potential buyers.

In October, the average two-year fixed rate surpassed 6%, a threshold not seen in 14 years. Given the rapid pace of change, it is understandable that both current and prospective homeowners are finding it increasingly challenging to select the most suitable mortgage deal.

As mortgage experts, we’ll do our best to explain exactly what’s going on.

Why are house prices falling?

This is due to the increased expense of mortgages. The Bank of England (BoE) has raised interest rates on nine occasions since December 2021, resulting in the current rate of 3.5% (which was further increased to 4% on 2nd February 2023).

As borrowing costs increase, numerous potential buyers are now unable to afford homes they could have previously purchased.

In the period between October and November of last year, the quantity of UK mortgage approvals declined from 58,997 to 46,075, which is a 20% decrease. Consequently, sellers are compelled to lower their asking price as demand shrinks.

According to analysts, property prices are anticipated to decrease throughout 2023, with projected declines ranging from 2% to 20%.

It is worth mentioning that these estimates do not include inflation, which, despite a minor decrease last month, still surpasses 10%. Consequently, some individuals believe that prices could fall by as much as 30% in real terms.

How much more will my mortgage cost me?

Moneyfacts.co.uk reports that the most favourable two-year fixed rate mortgage for those wanting to move home or refinance is 4.74%, and the most cost-effective five-year fixed rate is 4.39%. It is important to note that a maximum loan-to-value ratio of 60 to 65% is necessary to qualify for these offers.

For those on fixed-rate mortgages, the interest rate stays constant over the duration of the loan, usually two, five, or ten years. Once the term concludes, the borrower can either switch to the lender’s standard variable rate (SVR) or search for a new mortgage product.

For first-time buyers, however, the offers are less appealing, with rates of 5.24% and 4.84% for two-year and five-year fixed deals, respectively.

To highlight the deterioration in conditions for borrowers in the last year, it’s worth noting that the most affordable fixed rate in October 2021 was a mere 0.84%. Furthermore, 57% of mortgages that will need to be renewed in 2023 had fixed rates under 2%.

In monetary terms, the Office for National Statistics (ONS) has calculated that borrowers with a £300,000 mortgage could be paying as much as £661 extra per month when their current deal comes to an end.

The ONS has estimated that the average increase will be approximately £250 per month. Tracker rates, on the other hand, usually have lower initial rates compared to fixed rates. TotallyMoney.com states that the top two-year and five-year deals for tracker rates are 3.74 per cent and 4.1 per cent, respectively.

However, unlike fixed rates where the interest rate stays constant during the term, tracker rates are linked to a benchmark such as the Bank of England base rate.

For example, if the rate is set at 0.50 percentage points above the base rate and the base rate increases, which has been happening recently, the borrower’s mortgage payments will become more expensive.

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When will mortgage rates go down in 2023?

It’s the question on everyone’s lips, when will mortgage rates go down?

Experts predict that mortgage rates will gradually decrease throughout the year, even if the Bank of England base rate increases. There are even forecasts that average fixed rates could drop below 4 per cent by early 2024.

Why are mortgage rates decreasing despite the Base rate rising?

Many borrowers are currently wondering whether mortgage rates will continue to decrease despite the 50 basis point increase in the base rate to 4% last week.

However, some lenders have already decreased their fixed rates since then and are expected to continue doing so this week. Tracker rates will be impacted differently by the recent base rate increase. As a result, some tracker rates may now be higher than certain fixed rate products for the first time since the mini-budget.

Mortgage rates and the base rate are not directly linked. It’s important to clarify a common misconception. Mortgage rates are not directly tied to the base rate, as there are several factors that can influence them.

What factors are impacting mortgage rate now?

Although many factors impact mortgage pricing, there are currently three main factors influencing it, including:

  1. Internal Targets & Competitor Pricing
  2. Bank of England Base Rate Changes
  3. 5-Year Sonia Swap Rates

The first two points are self-explanatory, particularly since all lenders have set new targets for January and are now attempting to lend as much as possible at a competitive price in order to achieve those targets in 2023.

5-Year Sonia Swap Rates

Last week, the Bank of England’s Monetary Policy Committee raised the base rate by 50 basis points to 4% to curb inflation, which was widely anticipated by the market. Surprisingly, mortgage rates have continued to decline post the increase.

This is due to market sentiment that the Monetary Policy Committee’s move is necessary to tame inflation. Additionally, the 5-year SONIA swap rate, which is a benchmark used to price mortgages, has decreased to the lowest level since last year’s mini-budget fiasco. It has dropped from approximately 3.8% to 3.5% in the last month.

The Bank of England anticipates that inflation has now peaked in many advanced economies, including the UK. After the recent increase in the base rate, the BoE’s chief economist, Huw Pill, stated that it was crucial not to raise borrowing costs excessively high and suggested that this could be the final rate rise for the time being (according to Sky News).

So, what are swap rates and how do they impact mortgage rates?

Swap rates are an indicator of the market’s expectations regarding future changes in central bank interest rates.

They are based on assumptions about the anticipated interest rates over the duration of the swap rate. For instance, a 5-year swap rate represents the average expectation of interest rates over the next five years.

These expectations take into account various factors, such as inflation, commodity prices, and the overall state of the economy. Lenders use these swap rates to determine the cost of borrowing funds to support their own supply and demand.

These rates impact only fixed-rate mortgages: the higher the swap rate, the higher the mortgage rate before considering the risk and appetite for lending. Lenders use swap rates to mitigate the risk associated with changes in interest rates, and they allow lenders to hedge their risk by locking in margins.

By “locking in,” lenders can maintain their margins even if the cost of funds rises, such as in the case of an increase in the base rate. Not all banks opt to hedge using swap rates; some may choose to hedge naturally using savings bonds.

As of today, 5-year SONIA swaps have significantly decreased compared to the end of September 2022 when they were priced around 5.5%, the highest level ever recorded. The current rate for 5-year SONIA swaps is around 3.5%*. This reduction in swap rates means that obtaining a 5-year fixed rate mortgage should be much cheaper than in the months leading up to now. For instance, in October 2022, 5-year fixed rates were around 6.5%, whereas now they have dropped to around 4%.

Can we expect mortgage rates to continue to fall?

The outlook for mortgage rates appears positive due to the decreasing swap rates, along with the falling cost of fuel and the expected drop in annual CPI inflation to around 4% later this year, according to the MPC’s predictions.

The recent base rate increase is expected to further reduce inflation and maintain this downward trend. The government has pledged to halve inflation in 2023.

The declining swap rates indicate an increasing confidence in the reduction of rates over the next five years, potentially leading to a decrease in the base rate as the year progresses.

How can Strive Mortgages help?

If you are approaching the end of your current mortgage deal or looking to take out a new one, we can assist you in understanding your options based on your specific circumstances, such as your deposit, monthly mortgage payments, and help you make informed financial decisions. Get in touch with our mortgage brokers today.

For more information on interest rates, please contact a member of the Strive team, by emailing info@strivemortgages.co.uk or call us on 01273 002697.