The Bank of England held its Bank Rate at 5.25% in May, as was widely expected. It’s the sixth time in a row the Rate has been frozen since it rose to its current level in August last year.
The Rate had previously undergone 14 consecutive rises (between December 2021, when it stood at just 0.1%, and last August). The next interest rate announcement will be on 20 June 2024.
The plateau in interest rate rises has been made possible by continued cooling inflation. The Office for National Statistics shows that inflation tumbled from 3.2% in March to 2.3% in April. As recently as last September, the figure was 6.7%.
Experts reckoned that continued falls in the rate at which prices are rising will prompt the Bank of England to cut its Bank Rate – which helps determine mortgage rates – possibly as soon as June when the next decision is announced by its Monetary Policy Committee (MPC), or in August at the following meeting.
The next inflation figure will be announced on 19 June with the latest Bank Rate figure coming out the following day. But the significant fall in April’s inflation rate has already prompted lenders to make cuts to mortgage costs.
Average cost of popular deals
But how much are borrowers paying right now? Rates vary according to lender and deposit size, but according to our mortgage partner Better.co.uk, the average cost of a two-year fixed rate mortgage, across all borrower types* today, stands at 5.17%. The average cost of three- and five-year deals is 5.02% and 4.80% respectively.
The leading two- and three year fixed rate deals today are priced at 4.78% and 4.49% respectively. The best five-year deal today is priced at 4.31%.
The average two-year tracker rate mortgage is priced at 5.73%, with the best in this category priced at 5.39%.
The typical standard variable rate (SVR) stand at 8.05% today, according to Better.co.uk. It compares to just 4.75% in July 2022. The SVR is usually what borrowers revert to once their deal, such as a fix or tracker, has expired.
In terms of mortgage availability, as of the start of June, there were 6,632 residential mortgage deals on the market according to data provider, Moneyfacts. The number has steadily risen over the past few months. On 1 February for example the number of available deals was 5,787.
How does Bank Rate affect mortgages?
When the Bank Rate rises or falls, it has an effect on the cost of mortgages.
There are more than a million homeowners (according trade body, UK Finance) on variable rate deals, such as trackers, whose payment will immediately either rise or fall if Bank Rate is adjusted.
If Bank Rate rose by 0.25 percentage points for example, a tracker deal priced at 5% would rise to 5.25%. This increase would add an extra £30 a month on a £200,000 loan taken over 25 years, with monthly repayments rising from £1,128 to £1,258.
Borrowers on fixed-rate deals, where the interest rate is locked are sheltered from changes to the Bank Rate. However, when their deal expires – as will be the case for around 1.6 million borrowers over the course of 2024 – new deals will be more expensive.
What about house prices?
As it became clear we had reached the top of the interest rate cycle, signs for the housing market became largely positive. But recent data has reported a relatively flat market.
Nationwide’s latest house price report (published 31 May) found that prices edged up by 0.4% in May compared to a fall of 0.4% in April. It took the annual rate of increase to 1.3% from 0.6% the previous month. The lender attributes the slight rebound in the property market to solid wage growth and cooling inflation. It puts the cost of the average home in May at £264,249, compared to £261,962 in April.
Halifax’s latest house price report (published 7 May) showed that average property values in April climbed by a marginal 0.1%, having fallen by 0.9% in March. Annual growth in April grew to 1.1% compared to 0.4% in March. Halifax puts the cost of the average home in April at £288,781, compared to £288,430 in March.
Rightmove, which measures asking prices, found that average values in May were 0.8% higher compared to April. Year-on-year, asking prices were 0.6% higher in May, which compares to an annual increase of 1.7% in April. Homes listed for sale on Rightmove are now priced at an average £375,131 compared to £372,324 last month.
Why did the interest rate rise cycle happen?
Interest rates underwent 14 consecutive rises between December 2021 and August 2023 as the Bank of England’s Monetary Policy Committee (MPC) used hikes to cool the economy and tame soaring inflation.
Annual inflation, as measured by the Consumer Prices Index (CPI), peaked at 11.1% in October 2022. By April 2024 it had fallen to 2.3%. However, this still higher than the Bank’s target of 2%.
One of the main drivers behind runaway inflation had been the cost of energy bills. Energy regulator Ofgem’s energy price cap was as high as £4,279 in the first quarter of 2023 (although government intervention had applied a temporary ceiling of £2,500).
The current cap (effective from 1 April 2024) stands at £1,690 and is 12% lower than the previous £1,928 which applied between 1 January and 31 March 2024. It has now been confirmed by Ofgem that the cap will fall by a further 7% from 1 July to £1,568, where it will remain for the next three months until 1 September.
The energy price cap is the quarterly figure that represents the annual bill of a typical household paying monthly by direct debit (although actual bills are always determined by consumption).
Contact one of our highly experienced mortgage advisors today on 0121 500 6316 to discuss your mortgage needs.
