EXPECT 4.5% MORTGAGE RATES

19 November 2024

If you are thinking of buying a property, or having to re-mortgage after your 2 or 5 yr fixed rate expires, expect higher mortgage repayments.

From all I can work out, it looks like the BoE bank rate could be settling down from 4.75% today to a terminal rate of 4.25% in the second quarter of next year.

So there are hopes of Bank of England base interest rate cuts.... But this isn't the same as your mortgage rate., oh nooooo !

You'll be on a fixed-rate deal (2 or 5 yrs), and fixed rates move with swap rates, not the BoE base rate.

How are swap rates worked out?

"Fixed-for-floating swaps" is a deal where party A receives a variable interest rate linked to the BoE base rate over a period, by paying party B a fixed rate. 

Then party B adds on its costs and profit margin and that's what you, party C rhe mortgagor, will pay.

So the fixed rate reflects where market participants A and B expect BoE interest rates to average over the course of their agreement. 

As a result, swap rates tend to change when interest rate expectations change - expectations rather than actual interest rates.

The five-year swap rate has climbed from 3.75 to 4% since the Budget – despite the recent 0.25% interest rate cut to 4.75% BoE base rate.

Remarkably, more than a third of mortgagors are still paying rates of less than 3 per cent, thanks to cheap deals secured before rate hikes began. These are almost all due to expire over the next two years. 

This means that for the country as a whole, average mortgage rates are going to increase next year – even as the base rate falls further.

As the chart above shows, the Office for Budget Responsibility OBR forecasts that average rates will keep rising to 4.5 per cent by 2027, and stay elevated all the way to 2030. According to the BoE, the average household rolling off a cheap deal and having to remortgage, will see repayments increase by a quarter, or £180 a month. For an unlucky 400,000 mortgagors, payments are set to increase by 50 per cent or more.

So we need to put that in our budget spreadsheets. Locate your expected purchase or remortgage date on the graph above and then put that number in your spreadsheet, less any first-time buyer discount if applicable.