The Bank of England on Thursday raised the base rate by 0.5% to 5%, the highest level since 2008. The move follows a month of volatility in the housing market during which mortgage rates have spiked to highs not seen since the October mini-budget. But why are mortgage rates rising? When might they begin to ease? And how can borrowers best position themselves? To find out, we spoke to Simon Gammon, Managing Partner at Knight Frank Finance.
- Hi Simon, the Bank of England today raised the base rate for the thirteenth consecutive time and the newspapers are packed with stories about surging mortgage rates. Can you explain what’s happening?
We’ve now had two months of worrying inflation data. Core inflation - which excludes volatile items like energy, food, alcohol and tobacco and is much harder to tame - is still accelerating. That has fed expectations that the Bank of England will need to raise the base rate meaningfully above 5% in the coming months. It’s those perceptions that are influencing mortgage rates.
- How long are these trends likely to persist?
It’s hard to say. The Bank still expects inflation to ease later this year. It’s probably going to take two or three months of meaningful falls in core inflation before mortgage rates begin to ease. That means it'll likely be September at the earliest before we see any decent falls in mortgage rates and that may stretch into 2024 if inflation proves particularly stubborn.
We do know that the lenders don’t want to raise mortgage rates, but their hands are tied by their cost of funding, which is linked to interest rate expectations.
Their desire to maintain reasonable levels of business will mean that they should pass better rates onto borrowers very quickly once indicators of core inflation start improving.
- So, is your advice to borrowers to sit tight?
No, because while we’re hopeful that mortgage rates will improve, there’s also a risk they’ll keep rising. We’re advising borrowers to act sooner rather than later. Most mortgage offers are valid for at least six months and can be renegotiated if conditions improve. The best course of action is to lock in a rate today – don’t put it off.
Even if you’re a year away from remortgaging or making a purchase, it’s worth having a conversation with a broker. Everybody has a different set of financial circumstances – outgoings vary, as do types of income, levels of equity and appetite for risk. Lenders have many methods for assessing borrowers, and we’re in touch with more than 200. We can make recommendations tailored to your unique set of circumstances.
- I’m worried about the affordability of my mortgage payments. Is my lender likely to provide any help?
Yes, the lenders are expected to help borrowers through lean times. The Financial Conduct Authority said in March that lenders must offer existing customers a new deal, even when they fail other lenders’ affordability tests, for example. They must also consider ways to help customers with their outgoings, such as switching to interest-only deals for limited periods or extending their mortgage term.
- I’m worried about the value of my home. How bad are things going to get?
Knight Frank forecasts house prices will ease 10% over the next two years, which would bring values back roughly to the level they were at in March 2021. Stock levels are extremely low, which will offset pressure on house prices.
Stress tests introduced in the wake of the 2008 financial crisis mean arrears and repossessions are likely to remain low. The regulatory landscape is completely different to previous housing market downturns, which will keep forced selling to a minimum.
With that in mind, activity will bear the brunt of higher mortgage rates. It’s going to be a subdued year for the housing market, but we’re not expecting a downturn akin to the financial crisis or the 1990s. Conditions should improve from spring 2024 onwards.