How does a welcome drop in inflation to 4.6% affect contractor mortgages?
With quite a bit of interest and debate around inflation in its forum and on ContractorUK’s LinkedIn posts, it seems contractors are very vigilant of price rises. Either that, or contractors have developed a masochistic streak! After all, this has been an area which for a while has provided painful news, writes John Yerou, CEO of Freelancer Financials.
Setting the scene: front and centre is a two-year low in UK inflation
But what's been the catalyst for many-a-contractor turning keyboard warrior when the Consumer Price Index fluctuates by even just a jot? And how will the latest and bigger-than-expected fall in the UK’s annual rate of inflation, to 4.6% in October, affect contractor mortgages?
For the uninitiated, that represents the lowest CPI reading in two years. Even just comparatively few moons ago -- in September, inflation was an arresting 6.7%.
The tango: inflation and base rate dancing around one another
On November 2nd 2023, the Bank of England’s Monetary Policy Committee (MPC) voted (6-3) to leave interest rates unchanged at 5.25%.
That's only the second time we've seen such stability after 14 consecutive base rate rises prior to September.
The MPC has not ruled out further base rate increases, though. The panel warned that “if there were evidence of more persistent inflationary pressures,” they'd not hesitate to raise the base rate again.
Here, I want to look at why halving inflation (from 10.1%) is such a big deal. Moreover, what might inflation of under 5% portend for homeowners? And, thereafter, what might the BoE do with its base rate, with implications for contractor borrowing?
Inflation: a potted history
The Bank of England (BoE) has been consistently increasing its base rate to counter high inflation. It's begun to work, at least well enough for the bank to put the brakes on.
As mentioned in the intro, inflation stood at 6.7% in September 2023. That is down significantly from its peak -- 11.1% in October 2022.
However, October saw the much-anticipated lowering of energy price caps. This had a bigger-than-expected impact on inflation. And that’s why in October 2023, it dropped to 4.6%. While that’s the lowest in two years, and has prompted our prime minister to declare himself a success, (even though not everyone is convinced) annual inflation of 4.6% is still above the BoE’s target of 2%.
Signs are; inflation will continue to fall, albeit at a steady decline rather than at the likes of the sharp September-October fall. Nonetheless, this most recent drop may give the MPC wiggle room to drop the base rate sooner.
In its November Monetary Policy Report, the Bank of England has predicted that the base rate of 5.25% will be with us until the end of 2024. We'll then see a gradual decline down to 4.25% by the end of 2026.
The sole aim of keeping the rate this high is to further bring inflation under control. Many financial analysts predict that inflation won't reach 2% until the end of 2025. Looking at the BoE’s base rate trajectory, it could be longer than that. But the big drop this October is a good start!
Are we close to a recession?
Recent GDP figures from the ONS add to the uncertainty.
They show that the UK economy barely avoided falling into ‘recession’ this quarter (i.e. almost two consecutive quarters of negative growth).
Also outlined in the BoE’s November report, the bank was expecting flat GDP in Q3 and +0.1% growth in Q4. Instead, it flatlined in Q4, with no growth whatsoever.
October’s CPI will reassure those who were dreading another interest rate rise this year
Andrew Bailey, BoE governor, will therefore likely continue to dampen any talk of interest rate cuts -- for now.
But Bailey will have one eye on both inflation and GDP, given the latest drop in the former.
Given all the latest information, though, it seems the base interest rate will remain elevated for some time yet, even if fears of another base rate hike in 2023 should -- theoretically -- now recede, thanks to the CPI looking better in October than economists expected.
What’s been happening in the mortgage market?
Following Liz Truss' ‘infamous’ mini-budget in 2022, mortgage rates reached peaks at 6.75%. The market has much improved since, especially in recent weeks and months.
On average, mortgage rates are lower than they were this time last year.
Rightmove's weekly mortgage tracker showed that, as of 7th November, the overall average interest rate for:
- a two-year fixed deal was 5.80%
- (compared to 6.19% this time, 2022)
- a five-year fixed rate was 5.35%
- (compared to 5.92% this time last year).
Specifically, at 60% LTV, the average:
- two-year fixed rate was 5.35%,
- down from 5.96% last year;
- five-year fixed rate was 4.94%,
- down from 5.70% a year ago.
And, at 85% LTV, the average:
- two-year fixed rate was 5.94%,
- down from 6.23% last year;
- five-year fixed rate was 5.43%,
- down from 5.95% last November.
Sub-5% mortgage interest rates return to the market
In the past few days, we’ve seen high street lenders make a series of rate cuts across their mortgages for new and existing borrowers. For the first time in months, we're seeing 2-year fixed rates of under 5 per cent.
Nationwide’s two-year fix at 60% LTV with a £999 fee has been reduced by 0.25% to 4.99%. Over the past three months, Nationwide has reduced its rates eight times. In all, over that period, Nationwide’s rates have fallen by up to 1.39% points.
Along with stability in medium-to-long-term swap rates, the BoE's stabilised base rate has helped the rate reductions we're seeing. These have given lenders greater confidence in repricing their fixed-rate mortgages across their range. But even with this new confidence, one thing remains crystal clear: the age of under-3% mortgage rates is over!
Will mortgage interest rates keep falling?
It's difficult to predict how much further lenders can reduce their mortgage rates.
The UK's economy and financial systems are fragile to global dynamics. Events that could have serious consequences for inflation and domestic demand are still rife.
These, should they worsen, would influence the BoE base rate and lenders' mortgage rates.
Potential impact on the UK economy from the conflicts in Gaza and Ukraine
Russia's invasion of Ukraine has created an energy crisis and a surge in the price of food. These have undoubtedly had significant impacts on the UK economy and inflation.
Economists' and analysts' major concerns today, though, surround the conflict between Israel and Hamas. Humanitarian issues aside, it's the potential to disrupt the world economy that's most worrying them.
Conflict in the Middle East can send tremors through the world because the region is:
- a crucial supplier of energy, and;
- a key shipping passageway.
Another war in an energy-producing region could rekindle inflation. Worse, the global economy could easily tip into recession if more countries are drawn into the conflict in Gaza.
The current mortgage rates are huge improvements on what they were a few months ago. We expect more lenders to make rate reductions leading up to the end of the year. By how much is still unclear, and subject to escalation of both wars and their effects.
Lenders are introducing more innovative product options to first-time buyers. ‘Contractor-friendly’ lender Skipton’s 100% LTV mortgage, which takes rental payments into account, is one such example.
Based on information available to date, we expect mortgage rates to settle between 4.75% and 5.75% this year/into 2024. The exact rate you get will, as always, depend on:
- the mortgage LTV
- your credit history, and;
- your financial circumstances.
But -- there is still Autumn Statement 2023 to come next week. Who knows what lies in store, then?
In the meantime, the mortgage industry is continuing to look at ways in which it can support mortgage borrowers. As an integral cog in that arena, we welcome any questions you have about your specific situation. For everything else; there's ContractorUK's Forum, LinkedIn page and its profile on X (formerly Twitter)!
Find out more about Freelancer Financials here.