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From Record Lows To Soaring Highs: Tracing Mortgage Rates One Year After The Mini-Budget

As we reflect on the year following Kwasi Kwarteng’s mini-budget, we’re going to track the trajectory of interest rates and their impact on mortgages.

The last 12 months have been a rollercoaster, with mortgage rates seeing a massive rise from their historical lows in Jan 2021.

Around the middle of the previous year, the Bank of England base rate began its upward journey, profoundly impacting mortgage rates. Borrowers have been basking in the glow of meager rates since early 2015, with the average two-year fixed rate mortgage dipping below 2% and the average five-year fixed rate going under 3%.

By autumn 2021, these rates had plummeted to 1.2% and less than 1.3%, respectively. However, the bank rate escalated from a record low of 0.1% in December 2021, propelling mortgage interest rates to follow suit.

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The conservative mini-budget madness

The mini-budget presented by the Conservatives in September wreaked havoc, causing some mortgage rates to skyrocket beyond 6%. Nonetheless, greater returned when Rishi Sunak became prime minister, instigating a gradual rate decline. By the dawn of 2023, the average two-year fixed mortgage rate hovered just below 5.8%, with the Bank Rate at 3.5%. Experts at the time were bracing for further hikes before summer.

Contrary to expectations, the year kicked off with a steady decline in mortgage rates despite the rising bank rate and persistent high inflation. By June, however, the tide turned as lenders, unnerved by the ineffectiveness of base rate hikes on inflation, elevated the average two-year fixed mortgage rate to over 6%. Fortunately, this was not the end of the story, as individual rates began to descend again, buoyed by a significant reduction in inflation rates.

The unconventional trend

Curiously, we observed a rare trend where five-year rates dipped below two-year rates, a strong signal from lenders anticipating a future drop in the base rate. Indeed, the base rate saw its first freeze in 15 months on September 21, after 14 consecutive increases. This aligned with predictions from Capital Economics that rates might peak at 5.5%, lower than initially forecasted. This freeze is expected to usher in declining mortgage rates, which would provide relief for hard hit borrowers.

Are we at the top of the rate-rise cycle?

As borrowers nervously await the next Bank of England announcement on November 2, there is optimism that we might have reached the height of this chaotic phase of interest rate hikes. The aftermath of last year’s mini-budget is still palpable, with mortgage costs surging and subsequently undergoing corrections. However, as inflation shows signs of cooling off, the cost of fixed-rate mortgages appears to be downward.

The fluctuating Bank rate directly influences mortgage costs, particularly for the 1.4 million homeowners on variable rate deals. Borrowers on fixed-rate deals are insulated until their deal expires, at which point they might face higher costs. Additionally, the housing market has seen significant price fluctuations, with recent reports indicating a steepening decline in property values.

Understanding the rise in interest rates

The Bank of England’s Monetary Policy Committee (MPC) utilizes interest rate hikes to cool the economy and curb inflation. Although lower than its peak, the current inflation rate still far exceeds the Bank’s 2% target, necessitating decisive action to restore economic balance. The energy sector, a major inflation driver, has seen some relief with a reduction in the energy price cap, although prices remain significantly higher than in previous years.

In conclusion, while the UK housing market and interest rates have experienced turbulence over the past year, there is cautious optimism that we might have witnessed the peak of interest rate hikes. As inflation shows signs of subsiding and lenders adjust their rates accordingly, borrowers may find relief in the coming months. However, the complexities of the market underscore the importance of seeking professional advice to navigate these uncertain times.

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