There are compelling reasons to believe that mortgage rates will rise or fall in the months ahead. For borrowers, the best strategy is to lock in a deal now that can be renegotiated if conditions improve.

The Bank of England’s (BoE) decision to cut the base rate by 0.25% to 4.75% on Thursday was largely baked in, and will have little impact on mortgage rates in the coming days.

Consumer prices rose at the slowest rate in three-and-a-half years during September, and comments from policymakers including BoE Governor Andrew Bailey had made it clear that progress in fighting inflation warranted a lower base rate. Pricing in financial markets in recent days had put a 98% probability on a 0.25% reduction.

The outlook from here, however, looks more uncertain than it has for months. UK government borrowing costs spiked during the days following the 30th October Budget, as did swap rates, which are tools used by the lenders to price mortgages. Investors are sceptical that the government can spend an £70 billion a year without extra borrowing, raising taxes, or fuelling inflation.

The US election has added another dose of uncertainty. Treasury yields surged following Donald Trump’s victory, and the dollar it its highest levels against major currencies in a year. Both a signals that investors believe inflationary policies may be coming.

An alternative outlook

That said, there is an alternative outlook that looks just as compelling. Inflation is already below target and, though it is likely to tick up again in the coming months, the distortions that fuelled price rises in recent years have largely been unwound. Last month, Mr Bailey told the Guardian newspaper that the Bank could be a “bit more aggressive” and “a bit more activist” in cutting rates if the news on inflation continued to be positive.

Mortgages are priced based on the long-term outlook interest rates, so the uncertainties of the past fortnight are already exerting pressure on the lenders to raise rates. Margins are generally wafer thin, leaving them little room to manoeuvre.

But the banks loathe to hike mortgage rates when they are already behind on their targets. Sluggish (though improving) conditions in the housing market mean they are eager to make up for lost ground.

These competing tensions mean that the outlook for mortgage rates over the coming twelve months now looks very uncertain. We generally advise borrowers to lock in a deal as soon as possible – up to six months before they plan to make a purchase or remortgage – but that message is now particularly relevant. By locking in a deal now, borrowers can take the downside off the table. Any deal can be renegotiated if conditions improve.

If you are considering purchasing or remortgaging a home, please get in touch with one of our experienced brokers. We have relationships with over 200 lenders and we’d be happy to walk you through your options.