So, inflation is on the way down, albeit slowly. Can we take that to mean that mortgage interest rates will follow a similar trajectory? Erm, no.
Not now. Not even this year. Maybe not even next year, if the most recent IMF projection is to be believed:
The [IMF] now assumes it will take until the middle of 2025 for inflation to return to the British government’s 2% target – six months later than its previous estimate.
So, what does this mean for UK homeowners?
To answer that, let’s look at what’s going on in the background and at what connotations the global economy signals for each.
Who’s affected by the IMF mid-report update?
According to numerous studies, almost 1.6 million fixed-rate mortgage deals are due to expire by the end of 2023. There are also thousands of homeowners currently in limbo who’ve already dropped onto their lender’s SVR. Fact! and Fact!
By my reckoning, the amount of UK homeowners who’ll potentially face tough decisions could be closer to 2M than 1.6M. This could mean product switching their current deal or eventually remortgaging. Based on the volume of calls we’ve had this year, a hefty chunk of those are independent professionals.
The consolation for contractors and freelancers is scant, but nonetheless there. The effect of rising interest rates is universal, and doesn’t single out one group of industry or another. So, if you’re a homeowner and you’re reading this, read on…
Why won’t interest rates drop even if inflation is?
The IMF report singled out two central banks in its report which it insisted must continue with its ‘aggressive’ policy on raising interest rates: the US Fed and the Bank of England.
The Bank of England has raised its base rate 13 consecutive times. The US Fed has been almost as punitive, raising its base rate of lending 11 times. The driver behind these raises has been to get inflation down.
And, yay! It’s working. Should we celebrate? Erm, no.
So many factors affecting the Bank of England’s base rate (of lending)
Last month, the UK began to reap the rewards of the policy as inflation dropped to 7.9%. That’s still much higher than the government (or UK consumers) would like. But it’s a lot better than the 11.1% it peaked at in October.
So, after such a significant drop in inflation, are lenders going to mirror it with a drop in their interest rates? No. And neither are the BoE going to stop upping their base rate.
I could scramble your brains with details of Swap Rates, what they are and their additional influence on mortgage rates. Your time is precious, though, I know. But if you really want to, read my latest blog post on Freelancer Financials here.
Either way, the net result of all these financial shenanigans? Mortgage interest rates are going to rise further long before they begin to come down. Here’s why…
The base rate will continue to climb
After the recent drop in UK inflation, it was thought that the BoE’s Monetary Policy Committee might slow the rate at which it has been raising the base rate. It still might, but…
…up until the IMF’s mid-report update (25th July), experts widely predicted that the MPC would only raise the base rate by 0.25% when it meets on August 3rd. Now? I’m not so sure.
The government is desperate to bring inflation under control. Rishi Sunak even gave a personal pledge in January that he would halve inflation before the end of the year. At the time, inflation stood at 10.1%.
It’s now 7.9%, a drop mainly thanks to reduced energy prices. But food and grocery shopping inflation are proving to be sticky wickets.
The grain drain: why, in the main, it’s such a pain
Furthermore, due to recent developments in the Russia/Ukraine situation, global food prices are only going to go one way from here: up, and up, and up…
A combination of all these factors has almost given the BoE the green light to carry on raising the base rate by its regular 0.5%. And this after just a week of experts saying that the BoE’s base rate might peak at 5.75% rather than 6.0%. Don’t bet on it.
There is a silver lining: from inaction to action!
These underlying trends only back up what I’ve been saying for months. They combine to explain exactly why lenders are playing ‘now you see it, now you don’t’ with interest rates. There are too many factors at play to confidently say that rates are going to go down and stay down.
Yet, there is an upside to this. Whilst raised interest rates and a protracted drop in inflation aren’t the boost of confidence UK homeowners that were looking for, they are positive catalysts.
The biggest question for months (and months) from our mortgage clients has been this:
Should I stay on my lender’s SVR, switch to an interim tracker/interest only or take out a new fixed-term deal?
We can now answer that with confidence.
Suck it in and fix your mortgage now
If you’ve taken out a five-year fixed rate before rates began to spiral and have a few years left at sub-2%, do nothing. Sit back, gloat, whatever. Enjoy the years ahead of low repayments, and good luck to you.
I would say this, though. Do start to stick a little extra aside. Interest rates may have peaked and be on the way down when you come to remortgage, but the days of sub-2% mortgage interest rates are a footnote in history.
But if you do need to remortgage soon, whichever option you choose, you’re going to pay more for your mortgage.
Three options: SVR, Tracker or a new Fixed-Rate deal
Do you stay on your lender’s SVR until you see a deal you like? Rates are only going to go up, and your repayment with them. Chances are, you’re not going to see a comparative rate you ‘like’ for years.
Or maybe you switch to a tracker? Better than being on the lender’s SVR, but you’re going to pay more each month on a tracker as your lender’s base rate goes up.
Or, you could fix your interest rate now. Yes, you’ll be paying more than your current deal if you’re still on a fixed rate you took out a year ago. But you face that with every option out there.
There is only one sensible course of action to take, isn’t there?
Take advice. Don’t choose an “execution only” option, even if your lender has one on their site. Oh, the horror stories. We have an article on just that in the pipeline. Watch this space.
Do talk to a broker who has access to both the full scope of mortgages available and to specialist underwriters who understand contract and self-employed income. Let them do the searching for you; the water is murkier now than it has been for years.
Yes, you’ll be paying more than your current deal with the offers they bring to you. But by fixing in a mortgage rate now, even just for two years, you might escape the worst. Get in touch with Freelancer Financials now to begin that journey.
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