The Bank has been raising interest rates to tackle high levels of inflation. The Government sets the Bank a target of 2% inflation, and it was announced that the inflation rate had dropped by 0.1%, to 6.7%, in the month to August. Although a small drop, there was lots to indicate that inflation would rise this month on account of higher fuel costs. So this news was received positively by the markets, and since yesterday, opinion has been split around whether the Base Rate would rise again today, or stay the same.

The Bank is weighing up the need to lower inflation against keeping the wider economy healthy, and today’s announcement shows the Bank’s belief that its plan to tackle high inflation is working. And that continuing to raise rates may have a negative knock-on effect to households’ and businesses’ finances, further down the line.

What’s happened to mortgage rates recently?

Base Rate increased last month, but we didn’t see mortgage rates follow the same pattern. This is because mortgage lenders were expecting this rise, and had already priced it into the rates they offered to borrowers.

We’ve also seen mortgage rates edge down recently, and they’ve dropped consistently for the past 8 weeks.

Swap rates – which dictate the underlying costs of mortgages for lenders – have continued to fall, especially after yesterday’s positive inflation figures. So we can expect mortgage lenders to get even more competitive with their pricing in the coming weeks, and reduce rates even further.

What do the experts think?

Our mortgage expert, Matt Smith, says: “Today’s decision to pause rates is positive news for prospective home movers. It is likely that lenders will continue to reduce rates, as we’ve seen over the last eight weeks, and we may see the pace of reductions increase in the coming weeks.”

“History tells us that tracker mortgages may now become more appealing to borrowers. Whilst we expect five-year fixed rate products to continue to be cheaper than shorter-term deals for the foreseeable future, borrowers may be more willing to pay a premium to get a tracker or two-year fixed rate mortgage now, anticipating that rates will fall in the medium term, rather than locking themselves into a five-year deal at a high rate. However, the markets don’t anticipate the Base Rate falling from its peak until the end of next year, so this will need to be considered by borrowers when making a decision about the type of mortgage that is right for them.”

What does the Base Rate hold mean for my current mortgage?

Changes to the Bank’s Base Rate can impact how much interest you’ll pay on loans, including mortgages. If you’re on a fixed-rate deal, your monthly payments won’t change until the end of your deal. And if you’re on a variable or tracker mortgage, this month’s Base Rate hold will mean your monthly payments remain the same.

Matt adds: “The surprising decision to hold rates rather than raise them as expected is another indication that we may now be at the peak of Base Rate rises. It will be particularly welcomed by those on a tracker mortgage who won’t see a rise in their monthly payments for the first time since December 2021”.

If you’re coming to the end of your fixed-rate mortgage soon, you’ve probably already started to think about the rate you’ll be offered on your next deal. In July, the Mortgage Charter was launched to help those struggling to meet their monthly payments, as well as borrowers who are coming to an end of their fixed rates soon.

Under the Mortgage Charter, borrowers will be able to lock in a new deal up to six months before your expiring deal ends. You can also request a better like-for-like deal with your lender up to two weeks before your new term starts, if one is available.

When could interest rates start to drop?

The Bank of England’s Monetary Policy Committee meets about every six weeks to discuss and vote on whether interest rates should go up or down, or stay the same.

Though signs are showing that Base Rate may be nearing its peak, it’s thought it will remain flat for most of 2024, before starting to drop.

SOURCE: RIGHTMOVE