This disconnect between the base rate and mortgage rates has led to confusion and frustration, especially for those navigating the already challenging housing market.
The Bank of England’s base rate is the interest rate it charges banks and lenders for borrowing money. Traditionally, changes in the base rate influence mortgage rates: when the base rate goes down, mortgage rates typically follow suit, and vice versa.
However, the current divergence is due to a variety of economic and market factors that go beyond the base rate itself.
Lenders set mortgage rates based on a range of factors, including their perception of risk. Even with a lower base rate, economic uncertainty, inflationary pressures, and fears of a potential downturn can make lenders cautious.
Higher mortgage rates are often a reflection of this increased caution. Lenders are building in a buffer to protect themselves against future defaults or market instability, especially as many households face financial strain due to rising living costs.
Although the base rate has been cut, inflation remains a persistent concern. If inflation is running higher than anticipated, lenders may increase mortgage rates to maintain their margins and offset the increased costs of borrowing in the financial markets.
Kristian Derrick, CEO of Mortgageable, explains:
“Lenders don’t just look at the base rate; they take a broader view of the economic landscape. Persistent inflation and uncertainty about the cost of funding make it harder for lenders to offer lower mortgage rates, even if the Bank of England is easing its monetary policy.”
Swap rates—another key driver of mortgage pricing—have remained high. Swap rates are agreements between banks and financial institutions that allow them to lock in interest rates for a fixed period, and they influence the cost of fixed-rate mortgages.
Even with a lower base rate, swap rates have stayed elevated due to market volatility and longer-term expectations for inflation and economic growth. This directly impacts how much lenders charge for fixed-rate mortgages, regardless of the base rate.
The mortgage market has also been affected by shifts in demand and competition among lenders. As fewer buyers enter the market due to affordability challenges, lenders have less incentive to lower their rates to attract customers. Instead, they may maintain higher rates to preserve profitability in a smaller, more cautious market.
The Financial Conduct Authority (FCA) requires lenders to stress-test mortgage applicants to ensure they can handle higher rates. This, combined with stricter affordability rules, can push rates higher as lenders prioritise financial stability over competitive pricing.
For borrowers, the disconnect between the base rate and mortgage rates can be frustrating, but it’s important to understand the underlying factors at play. Higher mortgage rates mean larger monthly repayments, which can significantly impact affordability for first-time buyers and those remortgaging.
Kristian Derrick advises:
“While it might seem counterintuitive, rising mortgage rates during a base rate cut are a reflection of broader economic pressures. It’s essential for borrowers to approach the market with a clear strategy. Comparing lenders, exploring fixed vs variable rates, and working with an experienced broker can help navigate this challenging environment.”
1. Work with a Mortgage Broker
Mortgage brokers can provide access to a wide range of lenders, including those offering more competitive rates. Brokers understand the market’s complexities and can tailor their advice to your financial situation.
2. Consider Fixing Your Rate
While fixed-rate mortgages may seem expensive now, locking in a rate could provide long-term stability, particularly if further market volatility is expected.
3. Improve Your Financial Profile
Reducing debt, improving your credit score, and increasing your deposit size can make you a more attractive borrower, potentially unlocking better deals.
4. Plan Ahead for Remortgaging
If you’re coming to the end of a fixed-rate deal, start exploring your options early. This allows you to secure a new deal before moving to your lender’s standard variable rate, which is often much higher.
Looking ahead, there is hope that mortgage rates will eventually stabilise as inflation eases and market conditions normalise. However, in the short term, borrowers should be prepared for continued uncertainty.
Kristian Derrick summarises:
“The mortgage market is going through a period of adjustment. While rates may seem high now, they reflect the current economic realities. Borrowers who take a proactive approach—whether by consulting a broker or exploring creative solutions—will be better positioned to navigate this challenging time.”
