I've waited so long; is it best to remortgage now -- or will mortgage interest rates drop further?
August 7th 2023 was a bitter-sweet day for homeowners pondering their mortgage and remortgage options. It was the first day that average two and five-year fixed interest mortgage rates began a downward trend since May 2023, according to The Times’ Money Mentor.
So, is now the time to start popping the champagne corks and priming your contractor mortgage broker to begin looking for a new home loan deal for you? Or should you be sitting it out, waiting for those rates to drop further? That's the burning question everyone's asking, writes John Yerou, founder of Freelancer Financials.
How much have average interest rates gone down?
In the eight weeks since the August 7th data, barring one slight hiccup, those averages have continued to drop. But it's not like they've fallen off a cliff – and note, nor will they.
Rather, mortgage interest rates have trickled down, confirming just how cautious lenders are being. And they're right to be. They don't want the Financial Conduct Authority to take them to task, as the regulator did after the 2008 financial crisis!
Based on The Times Money Mentor trends, the average five-year fixed rate now stands at 6.06%, down from 6.37% on August 1st, and continues to drop, albeit marginally.
Their average two-year fixed rate is down to 6.56% from 6.85% at the beginning of August. But, key here -- that hiccup in the trend for two-year fixeds was that it actually rose back up to 6.66% w/e September 19th, before resuming its downward trajectory.
Will interest rates on mortgages keep on dropping?
One reason that two-year fixeds stalled, I believe, is that lenders were waiting to see by how much the Bank of England would raise the base rate on September 21st.
The hope was that the Monetary Policy Committee (MPC) had reached the end of its base-rate-raising cycle. But, with inflation remaining infuriatingly sticky, the markets remained uncertain.
As it turned out, the MPC did halt that run, deciding to hold interest rates at 5.25% – its first hold decision for 14 months. And, no sooner than the freeze was announced, those two-year fixed deals immediately began to drop.
Inflation and its impact on mortgage rates
But it's unthinkable that we'll get near the 2% inflation target that prime minister Rishi Sunak initially promised. But the PM will no doubt want to deliver on his revised promise: halving inflation by the end of 2023 when it stood at a little over 10%.
July inflation figures were promising, down to 6.8% from 7.9%. The base rate increments were predominantly responsible for that drop.
In August, the rate of that drop slowed dramatically. Inflation dropped by only 0.1%, to 6.7%. If inflation continues at this slower rate, Sunak will miss even that revised target. And if inflation starts to rise, don't rule out the BoE resuming its program of base rate increments to rein it in!
The general consensus in the markets, following all this latest activity, is that UK interest rates are set to average just above five per cent -- for the next three years.
The collateral damage of successive base rate rises
Two other quarterly datasets released in early September 2023 also give cause for concern:
- Unemployment rose by 159,000, to 1.46 million;
- Mortgage arrears (>= 1.5% of mortgage balance) rose by 13% -- and by a hefty 28.8% for the year.
That second figure has been characterised as 'terrifying'. What's more, these two sets of figures do have implications for homeowners.
The cost-of-living crisis is coming home to roost for both retailers and the general public. So it's understandable that controlling inflation is the government's number one priority. Well, that and the boats!
And, although the base rate is currently 5.25%, BoE governor Andrew Bailey has by no means ruled out further increases. Lenders have little wiggle room between where their average rates stand now and achieving parity with the base rate as it is. Even if the base rate rises by just 0.25% in the future, to 5.5%, that gap becomes less wiggle-able!
Don't let FOMO hold you back
One reason people have held back on remortgaging is that they fear missing out on a sudden huge drop in mortgage interest rates. This simply not going to happen.
It’s understandable I suppose -- because just look at the numbers. If you took out a two-year fixed during 2021 and 2022, you’d likely be on an interest rate of less than 2% (or even under 1%). The thought of paying between 6.5% and 7% today is, to them, unconscionable.
Don't be a lemming (among other dont's)
But we have to face facts and realise, we are where we are. We're unlikely to see cheap money on offer again -- as it was for so long after the 2008 financial collapse. That’s going to be the reality under this government, and potentially the next.
Mortgage interest rates may well start to fall back in 2024. But, it bears repeating – these rates won't go into ‘lemming mode’ and plummet over the edge of a cliff! Therefore, if you're looking to remortgage, move or buy a home and it really is your dream home, start making enquiries.
Don't lose it for the sake of a 0.25% saving which might take weeks or, more likely, months to materialise. Remember, it's taken eight weeks since the beginning of August to drop by something like that much, and that was from a position where there was much more wiggle room, by comparison.
Don't get caught in the ‘cheap money’ mindset. Those days are lost somewhere in a galaxy far, far away. And, most of all, don't be a lemming! You don't have to follow the 'trend'.