Does today’s lower than expected inflation reading mean mortgage rates have peaked? Brokers give their verdict…

There is hope for some ‘breathing room’ for mortgage rates after the latest inflation data showed that price growth is slowing, meaning there is less pressure for big base rate hikes.

The measure of consumer price inflation fell from 8.7 percent in May to 7.9 percent in June, falling further than the market forecast of 8.2 percent.

As a result, swap rates – the main pricing mechanism for mortgage rates – are expected to continue falling after falling slightly last week.

For the 1.3 million households that will have to re-mortgage over the next 12 months, the question now is whether interest rates will begin to fall from current levels or whether these levels, despite improving economic conditions, are the new normal.

Where are the rates now?

The market has seen a succession of rapid price hikes in mortgage rates as lenders struggled to stay ahead of rising swap rates.

Yesterday, Halifax raised its mortgage rates by a whopping 0.6 percentage point, with some of its fixed products now exceeding 7 percent.

A two-year fixed rate with a 40 percent down payment was 6.07 percent, rising to 6.67 percent from midnight.

NatWest has increased some of its fixed rate products by up to 0.4 percent for new business. All affected mortgages are for buyers or homeowners with 10 percent equity in the home.

Nick Mendes, mortgage technical manager at John Charcoal, says it’s hard to understand why NatWest has increased its rates, but suggests it may be to maintain service levels.

Across the market, the two-year average fixed rate is now 6.81 percent, according to Moneyfacts, up for the first time since July 14.

The five-year average with a fixed interest rate is now 6.33 percent, compared to 6.3 percent yesterday.

Despite market volatility, home prices rose 1.9 percent in the 12 months to May 2023, up from 3.2 percent in April, according to the latest data from the ONS.

Growth is expected to slow further as the full impact of rising mortgage rates hits demand, as the surge only started in the latter part of the month and as such will not be reflected in this data.

Will rates fall now that inflation has come down?

While swap rates are falling with the two-year rate well below 6 percent at 5.66 and the five-year rate at 4.8 percent, there are other factors that lenders consider when pricing.

First, while the cost of credit is now marginally down, lenders will be keen to play it safe and avoid getting caught if costs rise again.

This means they are unlikely to drop their prices in line with the swap rates and instead maintain a margin that will keep prices around their current level.

Mortgage rates have risen sharply since disappointing inflation data in May scared the hell out of the market

Jonathan Burridge, founder of hybrid mortgage advisor We Are Money said: ‘This news will come as a great relief to everyone, especially policy makers, but we need to see more before passing judgement.

“If this is a trend, we should see some easing in prices, but let’s not get too carried away just yet.

“Inflation is still too high so Bank of England interest rate policy is unlikely to change and traders have been anticipating this news so any adjustment will be slow and incremental.”

Second, despite the welcome drop in inflation, UK rates remain above their European counterparts and the Bank of England is expected to continue raising its key rates to further address the issue.

Markets still expect the rate to reach around 6 percent before the end of this year before falling in the first half of 2024.

This means that a sharp change in mortgage rates is unlikely in the near term as lenders take a longer view.

Chis Sykes, technical director at Private Finance, told This is Money: “It is very difficult to say explicitly what could cause interest rates to fall, but one thing is certain: if inflation continues to fall consistently and expectations continue to fall in the coming months, exceeds, it would impact lenders cost of financing and this could be passed on to borrowers.

“These data today are positive news as the BofE will of course take this into account the next time they meet and this will change their recommendations.”

However, many now expect mortgage rates to stop rising, which is a welcome relief to borrowers and brokers who have experienced rapid product withdrawals and rate changes in recent weeks.

Lewis Shaw, founder of Shaw Financial Services added: ‘This should mean that the Bank of England will only raise interest rates by 0.25% next month, so this is great news for mortgage holders.

‘I dare not say here that the fixed mortgage rate has reached its peak. We may see a little shuffling, but the sustained painful rises are over.

“That doesn’t mean we’re out of the woods because monetary policy is long overdue, but it does mean we can now see a faint ray of light at the end of the tunnel.”