Inflation And Interest Rates: Overview
2023 saw mortgage rates increase - often substantially - as the Bank of England (BoE) raised its base rate in an effort to curb the UK's rate of inflation. Inflation sat at 6.7% in September, which is still significantly above the government's 2% target but stable compared to August figures (October's figures will be released in mid-November).
It's hoped that inflation figures published in November will indicate that inflation reduced slightly in October. The BoE noted on November 2 (when it announced it had chosen not to raise the base rate for a second consecutive month) that inflation is expected to drop to 5% by year-end. Still, it may take longer to reach the government's 2% inflation target than initially hoped.
The fact that inflation looks to be stable and forecasters expect it to drop - albeit slowly - is, of course, good news. However, despite not raising the base rate in early November, the BoE has noted that it can't be 'complacent' when assessing potential rate rises over the next few months, so increases may still be on the cards. However, there are signs that base rate increases are hitting the mark with regards to bringing inflation down, with unemployment rates up, fewer vacancies and slowing price increases in areas like food and alcoholic beverages compared in September compared to August.
That said, geopolitical uncertainty, particularly with the developing situation in the Middle East, may yet impact inflation, particularly if it causes an increase in energy costs. Other unexpected 'outside' factors could also raise inflation, which the BoE will need to tackle, possibly by raising the base rate. So when it comes to the end of 2023 and looking into 2024, the story is relatively simple: if inflation continues on a downward trend, we are likely to see the base rate remain steady, and mortgage rates will remain at their current rates or fall slightly in something of a 'price correction'. However, if inflation rises, the base rate will increase, and mortgage rates are likely to rise too.
Interest Rates: A Plateau, Not A Peak?
Earlier in 2023, when it was less clear how the base rate might move over the remainder of the year, some corners thought that we might see a defined 'peak' in the base rate, with the BoE able to bring the base rate down by a few percentage points as soon as inflation eased or they hit the target. The BoE noted in its November 2 meeting that it's unlikely it can reduce the base rate in the short term, given monetary policy needs to remain restrictive to bring inflation under control. This means that rather than a peak, if anything, the base rate is likely to plateau (staying at the same rate for a relatively sustained period - likely at least a few months) before any potential drop that will filter down into a more significant mortgage rate reduction.
This doesn't mean that mortgages aren't getting slightly cheaper, however. The tail end of 2023 has seen interest rates drop, with some lenders reducing their product rates since the end of the summer as they could assess affordability better (particularly in the middle market). Mortgage products have 'corrected 'over the tail end of the year as lenders haven't needed to build in such significant margins as they did when there was more uncertainty over inflation, base rate increases and the UK economy. We expect that this downward trend in cost will continue into 2024 (at a gentle pace before it tapers off as lenders reach 'corrected' and competitive product prices). However, this downward trend in mortgage rate costs will likely stall if the UK base rate increases again to combat inflationary pressures, as lenders will likely raise their rates to match.
In the current market, the soundest recommendation for anyone who needs to refinance remains: look at remortgaging early - at least six months ahead of your fixed rate ending. Half a year is a long time when there's uncertainty over how the base rate will move, and it can be tempting to wait and see how things play out, starting the remortgaging process a couple of months before your fixed term ends. However, it is worth looking at refinancing options at least six months ahead. We can arrange for remortgaging offers six months ahead of your term ending, and you don't have to commit to taking this offer now. You can effectively 'hold' today's offer until much closer to the end of your current term (although it's worth checking all your documents are in order if you want to do this, as time will be of the essence if you want to change rates with just a couple of months to spare). If rates have gone up by the time your current deal comes to an end, you'll have locked in today's best rates, or we can seek other offers if the base rate has dropped by the end of the term.
Working with a broker six months in advance also means you have the opportunity to improve your credit score over a few months. If there are any quick wins, we can identify for you that you can implement now, with the aim of being able to access better rates later.
Fixed mortgage rates can be a good option for some mortgage holders, given they offer a degree of certainty over how much you'll pay for your mortgage. However, anyone considering a fixed rate in the current market is likely to think about how long to fix for. 2-year fixed rates potentially 'lock you in' for less time, allowing you to remortgage after 24 months, which could tie in with a base rate decrease and lower mortgage rates. It's also worth noting that these products can be more expensive than longer-term fixed rates (5-year fixed, for example).
In the current market, shorter fixed-term mortgages can potentially be a good fit for mortgage holders who are slightly bullish on the UK economy and expect that the base rate might fall by some margin by the end of 2024 and into 2025. Longer fixed-term rates tend to be more popular with mortgage holders who want more certainty over payments and believe that the base rate will increase or remain at the current level for some time. These products are generally cheaper than shorter-term fixed rates. However, if mortgages become cheaper before the end of the loan term, mortgage holders are effectively on the hook to pay more than they otherwise might with another product.
As always, there are advantages and disadvantages with short or longer-term fixed rates, although you're likely to find that you have an affinity for either one or the other option based on your risk appetite, desire for certainty over costs, outlook on the UK market and base rate and other financial factors that are specific to you and your situation. Personalised mortgage advice tailored to your current financial situation, plans and requirements is essential to ensuring you can make the best decision for the option that is best for you.
Variable-rate mortgages are increasingly popular in the current environment, especially for high-net-worth individuals for whom the certainty of a monthly mortgage cost may be less important than in the middle market. Variable-rate mortgages follow the BoE's base rate in near real-time, with the lender's fee on top.
Mortgage holders that might opt for variable rate mortgages in the coming months may have taken out a mortgage to optimise cash flow and circumvent the need to use all or a significant portion of their available capital reserves to buy real estate without finance rather than because it was the only way to finance a property purchase. As a result, variable-rate mortgages can be more advantageous lending products for individuals who can easily absorb the risk of potential base rate increases risk because they have significant disposable income and assets.
While the BoE may hold the base rate or increase it in the short term, some mortgage holders believe that rates will drop again in the coming months, and this will be reflected in reduced mortgage rates. With a variable-rate mortgage, a potential reduction in the UK's base rate would be passed on almost immediately. This would mean they can benefit from a cheaper rate without having to refinance or wait until the end of a fixed term.
Variable rate mortgages aren't for everyone, but they can be good products to explore if you have the matching risk appetite, good disposable income that allows you to absorb potential increases in your monthly mortgage cost and believe the base rate may come down in the coming months. Variable-rate mortgages can also be advantageous in other ways, as they can sometimes be cheaper than fixed-rate alternatives or have lower lender fees. Whatever your situation, we will talk you through all your options and the potential benefits of variable-rate mortgages compared to fixed-rate equivalents if they are something you would like to explore.
Remortgaging: How We Can Help
For anyone who needs to remortgage, personalised advice is essential, especially if there is anything in your background that might make accessing the most competitive product on the market challenging. This could be the fact that you are self-employed or an entrepreneur, you have multiple income streams or income in different currencies, you are a non-resident mortgage holder, a buy-to-let landlord, or you want to access a large mortgage. We will work to understand your requirements and financial situation and then give you a cost analysis and comparisons of different products that will suit your needs.
Specialists in high-value and high-LTV remortgaging, our expert team can assist you by:
We have over a decade of experience successfully helping high-net-worth individuals remortgage, ensuring they access the most favourable rates and terms available on the market. Whether your current mortgage terms are nearing expiration or if you're on a variable rate and want to explore alternative mortgage solutions, don't hesitate to contact us.
Islay Robinson, a founder of Enness, is widely regarded as one of the UK's leading mortgage brokers. He has been instrumental in delivering some of the most complex and high value mortgages in the UK.