The immediate future of mortgage interest rates

What Will Happen to Mortgage Rates Now? Bank Bosses Explain

Mortgage rates have been steadily climbing over the past year as the Bank of England has raised interest rates in an effort to tame inflation. This has put significant pressure on homeowners, with many seeing their monthly payments jump by hundreds of pounds.

In this post, we’ll summarize insights from bank economists on where mortgage rates may head next and strategies for homeowners to navigate the volatile market.

Have Mortgage Rates Peaked?

The Bank of England held off on raising interest rates again at its latest meeting on September 22, keeping rates steady at 2.25%. This pause has led some experts to believe that mortgage rates may have reached their peak.

Mark Bogard, CEO of Family Building Society, advises that **variable rate mortgages may be the best option for now.** He believes rates could start coming down by next autumn, so going with a flexible variable rate allows borrowers to lock into a fixed rate later when rates drop.

However, fixed rates still provide payment certainty. Nationwide’s Robert Gardiner notes people are willing to pay a premium for two-year fixes, betting that rates will fall by the time they renew in 2024.

Why are variable rates a good option now?

Variable rate mortgages essentially track the Bank of England’s base interest rate. When the central bank raises rates, variable mortgage rates go up accordingly. However, Bogard believes the Bank’s rate hikes may be largely finished for the time being.

If rates have peaked, variable mortgages would follow suit. Going with a variable rate means you can take advantage of decreasing rates in the future without being locked into a costly fixed rate.

Many variable rate mortgages also don’t charge early repayment fees, meaning borrowers can switch to a fixed rate as soon as a good deal emerges. This flexibility allows homeowners to try to time the market and find the optimal rate.

The case for fixed rates

While variable rates offer flexibility, fixed rate mortgages provide certainty. By locking in your rate for 2 to 5 years, you know exactly what your monthly payments will be over that period. You avoid any surprises from future rate hikes.

Yes, you may pay a slight premium compared to current variable rates. But for many borrowers, peace of mind is worth it. If economic conditions allow rates to fall in a few years, you can then switch to a new fixed rate and lock in the savings.

It’s a gamble either way you look at it. With fixed rates you potentially pay more now but are protected later. With variables you have uncertainty but can try to switch at the optimal times.

How Quickly Could Rates Fall?

While rate hikes may be slowing, economists caution that substantial drops are still a way off.

– Rates are projected to only fall to around 3.8% over the next 5 years, not back down to the historic lows below 2%.
– It will take time for the Bank of England’s rate hikes to fully impact inflation. More data is needed to determine if they’ve raised rates enough or gone too far.
– **Frances Haque of Santander believes rates will remain steady for 12-18 months before slowly decreasing, with no significant drops until 2025.**
– HSBC’s Liz Martins agrees, seeing rates falling only marginally over the next 5 years.

So while increases are plateauing, borrowers shouldn’t bank on rapid rate decreases anytime soon. Patience will be needed.

Why are rapid rate cuts unlikely?

Central banks don’t like to reverse course too quickly. They want to take a cautious, measured approach to rate changes.

The Bank of England is also data dependent. They will want several months to evaluate how their recent hikes impact the economy and inflation. Moving too fast risks overcorrecting.

Haque points out it takes time for rate hikes to fully work their way through the economy. The full effects likely haven’t been felt yet. More wage and inflation data are needed before determining the appropriate next steps.

Additionally, other major central banks are also still raising rates, notably the Fed in the US. This global tightening influence means the Bank of England cannot diverge too much.

Signs Rates Could Fall Faster

While a patient approach is most likely, certain economic developments could cause a faster drop in rates.

– **Inflation dropping more than expected** could show tightening is working faster than thought. This could allow rates to fall quicker.
– **Unemployment rising** while wage growth remains high creates mixed signals. If wage growth slows significantly, rates may not need to stay as high.
– **Further mortgage rate cuts** like those just announced by NatWest and TSB could continue if swap rates keep falling, indicating more room for mortgage rate decreases.

How inflation could change the trajectory

Inflation is the key metric the Bank of England is watching. If it declines sharply in the coming months, it may give them confidence that rates can come down.

The latest inflation reading showed a larger than expected drop to 6.7%. If this trend continues and inflation keeps rapidly approaching the 2% target, the Bank may act more aggressively in cutting rates.

However, energy prices and the war in Ukraine make inflation very unpredictable. A resurgence could cause the Bank to halt rate cuts or even consider hikes again. It will take sustained data showing inflation is under control before they likely loosen policy.

Wages and unemployment

Wage growth remains strong while unemployment has ticked higher. This mix creates a dilemma – are rate hikes slowing the economy too much or does wage growth mean inflationary pressure remains?

If wage growth moderates, it would indicate rate hikes are having the desired effect. This could enable rate cuts sooner than if wage growth stays stubbornly high.

Rising unemployment also cools inflation if it persists. But major job losses risk overcorrecting and damaging the economy. The path forward depends on achieving a delicate balance.

What This Means for Homeowners

While the crystal ball remains cloudy, we can draw some implications for homeowners based on the current environment.

– With further major hikes unlikely, monthly payments are stabilized for now. But gradual increases could still occur.
– **Variable rate mortgages** are an option for those willing to take some risk that rates fall within 1-2 years. Trackers allow exiting for a fixed rate when the time is right.
– **2-year fixed rates**, though costlier, lock in payments for those wanting certainty and anticipating improved rates in 2024.
– **Overpaying mortgages** can substantially reduce interest costs and required monthly payments. Saving now for a lump sum payment before renewing softens the blow.
– **Know your budget options** before renewal by forecasting potential new monthly payments in advance.

Should I go variable or fixed?

It’s a complex decision that depends on your personal risk tolerance and financial situation.

If you can stomach some uncertainty, variables offer flexibility to try to take advantage of drops when they come. But if peace of mind is critical or your budget is tight, a fixed rate guarantees what you’ll pay.

Consider what rates might be in 2 to 3 years based on forecasts. Are you willing to bet rates will fall? How much risk can you handle? These are key factors in choosing the right approach.

Overpaying – an underutilised strategy

Overpaying your mortgage is one of the most effective ways to reduce interest costs and lower required monthly payments.

Every extra pound you pay goes directly towards reducing your principal. This means all future interest is calculated on a lower balance.

The impact of even relatively modest overpayments can really add up over time. It’s an especially powerful strategy leading up to renewal. Paying just £200-300 extra per month can make a meaningful dent.

Get ready well in advance

Many borrowers don’t look at what their new rate will be after fixed terms end until right before renewal. This can lead to stressful, last minute surprises.

Doing some projections 12-18 months out is wise. Analyze what monthly payments might be depending on projected rate changes. This allows more time to prepare and avoid scrambling.

If required payments will stretch your budget, you can alter overpayment plans or look at term extensions. Planning ahead gives you options.

Forecasting Future Rate Changes

Trying to predict where mortgage rates will go is extremely challenging, even for the experts. Economic modeling is imperfect and unexpected world events can rapidly change the landscape.

However, looking to market forecasts can provide ballpark expectations. Here are some of the factors economists will be watching closely.

Bank of England policy

As the central bank controls the base interest rate, its monetary policy actions directly influence mortgage rates. If they continue raising rates, expect mortgage rates to follow.

But now that they’ve paused, many anticipate rates have peaked. The timing and magnitude of future drops will depend on inflation and employment data.

Watch for signals from the Bank on their economic outlook. The minutes from their meetings can provide insight.

Inflation readings

The main driver of central bank policy is bringing inflation back to the 2% target. If inflation persists well above this rate, the Bank may be pressured into further hikes.

But if it shows a steady downward trajectory, rate cuts could come quicker. Inflation is likely the single most important metric to monitor.

Employment and wages

To slow inflation, the Bank wants to cool the economy and labor market. If wage growth starts meaningfully decreasing, it suggests their policy is working. This could pave the way for rate cuts.

But continued strong wage gains may mean more tightening is needed. And a severe spike in unemployment could give them pause.

Global environment

With major economies globally tightening policy, the Bank of England cannot get too far out of sync. If the Fed keeps rates high in the US, the Bank’s room to cut is limited.

Geopolitical instability like the Ukraine war also drives volatility. A worsening situation could lead to energy price spikes and inflationary pressure.

Market indicators

Swap rates and yield curves reflect expectations of future policy and economic conditions. Inverted yield curves that see shorter term rates higher than longer term ones can signal impending recession.

Falling swap rates like those seen recently indicate markets anticipating room for mortgage rate cuts. Tracking these market dynamics provides helpful data points.

Final Thoughts

The mortgage market remains highly unpredictable. But the outlook has certainly improved from the bleak picture earlier in 2022.

While rapidly falling rates are unlikely, the era of dizzying monthly increases appears to be in the past. Homeowners can breathe a little easier.

There are also strategies like overpaying, extending terms, and thoughtful product selection that can provide savings. Staying nimble and informed gives borrowers options amid the uncertainty.

Patience and prudent planning will be key virtues for navigating the mortgage market in the coming years. With inflation slowly coming under control, perhaps the historically low rates of the past decade will return sooner than expected.