The past months have provided much good news for the base rate, with the Bank of England announcing a 25 base point reduction in August, a hold on rates in September and a further 25 base point reduction in November. All told, base rate has reduced from 5.25% to 4.75%.
The drop in base rate in August was the first since 2020, during the COVID-19 pandemic, and left many hopeful that mortgage rates would automatically drop in parallel.
However, the link between base rate and mortgage rates is a complex one, with several domestic economic factors and foreign political developments also having an impact on the housing market.
Cooper Associates Mortgages have broken down the wider factors impacting mortgage rates and explain why rates haven’t fallen following the latest reduction in November.
How do lenders set their rates?
Contrary to popular belief, in the majority of cases lenders rates are not set against the base rate, but rather Swap rates.
A Swap rate, in essence, is a fixed interest against which a lender would have borrowed from another financial institution. The lender then offers the borrowed money at a slightly higher rate, as a mortgage, to the public.
For example, a lender may borrow £1 billion at 4% over 2 years, and pass this on to clients as a series of 2 year fixed-rate mortgage products at 4.25%.
Why are mortgage rates on the rise?
Swap rates do not reflect the current state of the interest rate market, but instead are based on future market expectations and predicted rate trends.
Factors such as domestic economic or fiscal changes and international political developments can impact market predictions and prevent mortgage rates from falling.
A decline in base rate may not be reflected in mortgage rates if the market believes the drop is only temporary or expects inflation pressures to continue.
At present, a combination of factors, specifically the recent Labour government budget announcement, the US presidential election and the collapse of the German government, are driving market volatility and providing uncertainty for the future. This is in turn driving mortgage rates up despite base rate coming down.
With the future of interest rates still uncertain, you should consider locking in your fixed-rate mortgage now. After your application we monitor the rates with that lender, meaning that should a better rate become available once you have secured your deal, we will help you make the switch.
Speak to an expert mortgage adviser today to find out how we can help you secure the best mortgage at the right time.
