Can Labour really cut mortgage rates?

Higher mortgage rates have been a thorn in the side of homeowners for almost two years.

According to Moneyfacts, the average interest rate on five-year fixed-rate mortgages is still above 5%, while the interest rate on two-year fixed-rate mortgages is closer to 6%. That’s a lot lower than the 2.5% averages we saw at the start of 2022.

Labour’s campaign promised change for the country, and falling mortgage rates would certainly mean a positive change for many.

The higher mortgage rates are partly due to the Conservative government’s mini-budget in 2022, when unfunded tax measures caused market panic and average rates shot up to almost 7 percent.

Now Labour claims it will provide economic stability, with tough spending rules to keep mortgage rates as low as possible.

Can the government influence interest rates?

Although Labour promises to keep mortgage rates low, economists point out that in reality the party has little influence on this.

This is because interest rates, which in turn affect mortgage rates, are set by the Bank of England, which is independent of the government.

Andrew Wishart, senior economist at Capital Economics, said: ‘The government has little control over mortgage rates and given the limited divergence in the party’s fiscal plans there is little reason to change the outlook for the base rate.

‘But by being cautious, a Labour government should avoid raising interest rates, as Liz Truss did with her “plan for growth”.’

Interest rates will fall anyway

But even if Labour has little or no control over the direction of interest rates, it may have come to power at just the right time to see rates fall.

Some mortgage lenders are already cutting interest rates. Barclays, HSBC and others did so this week.

The Bank of England is expected to cut interest rates this year once inflation is under control.

Consumer price index inflation fell back to the Bank of England’s target of 2 percent in May.

This means inflation has now fallen to its lowest level since July 2021 and is significantly lower than the peak of 11.1 percent reached in October 2022.

Although the Bank of England has kept the base rate at 5.25 percent since August 2023, markets are confident the first cut will come by the end of this summer.

David Hollingworth, deputy chief executive at L&C Mortgages, said: ‘Inflation is back at the Bank of England’s target level and if this looks likely to be sustainable in the longer term, we could see a cut in the base rate from the new government shortly.’

However, the first reduction in the base rate may not lead to a drastic reduction in the fixed mortgage rate.

This is because lenders base their interest rates on broader market expectations about the development of interest rates. In addition, money markets have already factored in a cut in the base rate in the summer.

Where are mortgage rates headed?

Mortgage rates started this year on a downward trend as markets significantly increased expectations of base rate cuts.

However, this quickly changed and in early spring we saw a wave of mortgage rate increases.

Markets are now predicting that the base rate will fall to around 3.5 percent over the next two years.

Hollingworth says: ‘Even if the base rate is cut in August, that may not lead to much movement in fixed mortgage rates.

‘If markets feel that interest rates can be cut harder and faster, then that could have consequences.

‘Fixed rates will always fluctuate depending on sentiment. We have seen rates rise slightly in recent months, but recent cuts have reversed some of those increases.’

Currently, the lowest two-year fixes hover just above 4.6 percent, while the lowest five-year fixes hover just above 4.2 percent.

Earlier this year, when markets were expecting six base rate cuts in 2024 alone, the lowest two-year fixed rates were hovering around 4.2 percent and the lowest five-year fixed rates were below 4 percent.

Richard Donnell, head of research at Zoopla, believes the lowest mortgage rates are unlikely to change dramatically in the short term and he does not expect rates to surpass the lows seen at the start of the year.

“Current mortgage rates already assume a number of reductions in the base rate,” Donnell said.

‘The base rate is expected to fall to 3.25 percent or 3.5 percent in the next 12-24 months, but mortgage rates are expected to remain between 3.75 and 4.5 percent.

“That’s low by historical standards, but not by the recent past, when quantitative easing kept borrowing costs very low.”