Would a base rate rise to 4% rise mean mortgage rates start to go up again?

Since December 2021, the Bank of England has been slowly raising its base rate in an effort to tackle record inflation.

Just over two years ago, the rate was 0.1 percent, but it’s now 3.5 percent — the highest since October 2008.

Banks have generally responded to these base rate increases by raising both savings and mortgage rates. However, last September’s mini-budget threw this off balance, as the economic turmoil it caused initially drove average mortgage rates well above base rates.

Since then, mortgage rates have fallen – and even after the last hike in base rates in December, the average has continued to fall.

This week Virgin Money launched the first fixed mortgage with a rate of less than 4 per cent seen for months – although the 3.99 per cent deal has a fixed term of 10 years and is only available to those with a down payment of at least 25 percent. cent.

But now that base rates are set to rise again, mortgage holders may worry that mortgage rates will rise again.

We look at where mortgage rates are today and how likely they are to rise.

How does the base rate affect my mortgage?

Fixed mortgage rates are not tied directly to the base rate in the same way that tracker and variable products are, but lenders tend to pass base rate increases to customers who have taken out new fixes in the last 12 months.

Despite base rates continuing to rise, the typical two-year fixed-rate mortgage has fallen from a peak of 6.65 percent in October to 5.45 percent on Jan. 31, according to Moneyfacts.

Five-year fixes followed a similar trajectory, from a peak of 6.51 percent in October to 5.20 percent today.

This is because mortgage rate hikes pre-empted the Bank of England.

While rates were already rising as a result of the base rate hikes, they peaked after the ill-fated mini-budget announced by Liz Truss’ government and are now gradually falling.

And more good news for borrowers: lenders have started what brokers call a “price war.” Major lenders, including Halifax, Santander and Barclays, have all cut their fixed mortgage rates in the past two weeks.

Recently, Coventry Building Society cut all of its five-year fixed interest rates on five and ten percent mortgages.

Will the next hike in base rates drive up mortgage rates?

Predictions about how high base rates will rise this year have plummeted as the impact of September’s mini-budget has dissipated.

In the aftermath, it was feared that the Bank would have to raise its interest rate to 6 percent to bring inflation back under control.

However, most now expect it to peak at around 4.5 percent in the summer of 2023, before falling again later in the year.

It comes on the heels of the latest signs that inflation is being brought under control as official figures showed factories cut prices in December at the strongest pace since April 2020.

Craig Fish, founder of Lodestone Mortgages and Protection says: ‘While lenders monitor the Bank of England’s base rate and their tracker products are affected, fixed rates follow swap rates, which are steadily falling.

‘With the improving economic outlook, it is expected that swap rates will fall further and that fixed rates will follow.’

Swap rates are an agreement in which two banks agree to exchange a stream of future fixed interest payments for another stream of variable interest payments, based on a fixed price. They usually show where the markets think mortgage rates are headed in the longer term.

However, according to experts, it is unlikely that mortgage rates will fall drastically.

Greig Cowley, mortgage broker at Riverside Mortgages, added: “Mortgage rates, swap rates and government bond yields are close to equilibrium, and while we may see more reductions in fixed rates from lenders, there will be nothing to set the world on fire and set fire.

“Our message to potential homebuyers is that this is the new normal and it won’t change anytime soon.”

What does this mean for a fixed rate mortgage?

While the base rate affects the mortgage price, lenders also base their rates on several other factors, including market confidence.

“The base rate does have an influence, but mainly in the reasons for the increase, not in the increase itself,” says Lee Johnson, director of mortgage brokerage Willow Private Finance.

Inflation is declining, albeit slowly, and is expected to continue from the beginning of this year on a backdrop of healthy real estate and credit demand, in stark contrast to late 2022.

“This confidence, flexibility and increased competition between lenders should mean that rates will not be negatively impacted by the BoE decision.”

This view is supported by other brokers who say that the cost of borrowing has now come down since the volatility of late last year, and that a rise in base rates is unlikely to lead to a rise in fixed rates.

Aaron Forster, director at broker Create Finance says: ‘Even with a hike in base rates, I think it’s unlikely we’ll see mortgage rates fall.

“The banks are just waiting for the right time to buy money to fund the loan and that means they will be even more aggressive with interest rate cuts.”

This view is not universal, however, with some warning that an increase in base rates will affect borrowers.

Self-powered Mortgage Hub’s Graham Cox says lenders had more “wiggle” between rates and base rates in December, allowing them to take the hike “in their stride.”

But with fixes for the top customers down to 4 to 4.5 percent, there isn’t much margin for lenders if, as expected, the base rate hits 4 percent.

“My best guess is that fixed-rate mortgages will rise 0.25 to 0.4 percent next month.”

Is switching to a tracker a good idea?

Unlike fixed rates, tracker rates are directly linked to the base rate of the bank, usually with an amount on top.

So if the rate rises 0.5 percent as predicted, those with tracker rates will see their mortgage payments rise.

Since fixed rates rose sharply in October last year, it has become significantly cheaper for homeowners to take out a tracker rate mortgage. However, a higher base rate puts this in doubt.

“We will be in a situation where tracker and fixed will be broadly the same, with the expectation that bank rates will go up,” said Ray Boulger of broker John Charcol.

“A few months ago there was a really strong case for getting a tracker, but since flat rates have come down quite a lot, it’s worth thinking about a solution.”

Boulger adds that while fixed rates should continue to fall, they have now fallen to the point where they are attractive.

“For the average consumer, it’s probably better to fix it for five years rather than take a tracker rate,” he adds.

But it’s worth remembering that fixed rates come with a prepayment fee, which often makes it expensive to get rid of when rates drop dramatically.

Floating rates generally don’t, so there may be circumstances where a floating rate remains the best option.