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Interest rates held at 5.25%: here’s what it could mean for mortgages

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The Bank of England (BoE) has announced it will hold the Base Rate at 5.25% again this month. This follows the same decision as in September, November and December, when the Base Rate was held after 14 consecutive rises.

The Bank had been raising interest rates to tackle high levels of inflation, which was in excess of 10% in early 2023 – way above the government target of 2%.

Inflation had been falling relatively sharply throughout the latter half of 2023, reaching as low as 3.9% in the month to November.

But in January, it was announced that inflation had grown slightly in the month to December, to 4.0%. And even though only slight, it was the first increase we’d seen since February 2023.

The Bank’s Base Rate hold today was widely expected, and this decision – a fourth consecutive hold – shows the Bank’s belief that its plan to control inflation is working.

Inflation increased last month – should we have expected a Base Rate rise today?

The Bank needs to strike the right balance between lowering inflation and keeping the wider economy healthy.

While raising interest rates is the Bank’s ultimate means of bringing down inflation, another rate rise today may have had a negative knock-on effect to households’ and businesses’ finances, further down the line.

What’s happened to mortgage rates recently?

Base Rate was held at 5.25% in September, November and December, and we saw mortgage rates edge down through this period and into January.

The somewhat unexpected rise in inflation announced in January (+0.1%) resulted in swap rates – the underlying cost of mortgages – edging up by around 0.3%. And this led to some lenders reversing some of the rate cuts they’d made in recent months. This was particularly true of the higher loan-to-value brackets, where we’d seen lenders jostle for business, and make more significant cuts to their mortgage rates.

However, swap rates have since levelled off, and we can expect the next few weeks to be steady in the mortgage market, ahead of the Spring Budget at the beginning of March.

The average 5-year fixed rate has fallen from 6.08% in July 2023, to 4.66% this week, and the average 2-year fixed rate has fallen from 6.61% in July, to 4.99%. You can check the current average mortgage rates for different terms and deposit sizes here, which we update weekly.

What do the experts think?

Our mortgage expert, Matt Smith, says: “As painful as rate rises have been for many people, there are increasing signs that Base Rate rises are having a real impact on the economy, and inflation is heading in the right direction. Another hold in the Base Rate today also shows that the Bank will also be cautious not to overshoot Base Rate rises, and will be keen to maintain the current stability.”

“The market appears more robust than last year, evidenced by the fact that the surprise uptick in inflation a couple of weeks ago didn’t derail the downward trend of mortgage rates. The big picture remains the same – the Base Rate is unlikely to rise further, and mortgage rates have some room to come down further before settling.

“It’s been a promising start to the year for housing market activity, with more people than this time last year listing their home for sale, looking to buy, or getting a Mortgage in Principle to see what they can afford. For anyone thinking of moving but still holding back from taking action, the slight uptick in average rates in some lower Loan-To-Value brackets this week is a reminder that average rates won’t fall forever, and mortgage rates appear to be settling after significant drops at the start of January,” he adds.

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.

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.

A good way to find out how much you could borrow is to use a mortgage calculator. And to get a personalised result by applying for a Mortgage in Principle which will take you one step closer to a mortgage offer.

In July 2023, 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.

If you want to know more about what to consider when looking for a mortgage rate, take a look at our article: choose whether a 2 or 5-year fixed could be the right option for you.

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 is at its peak, it is likely to remain flat into 2024, before starting to drop back. History has shown that after interest rates have increased over time, they have remained flat before starting to come down.

In late 2023, the markets were predicting that the first Base Rate reduction may come as soon as late Spring 2024. However, the Bank of England has since warned against cutting the Base Rate too early, and that there is still a long way to go before inflation reaches its 2% target. Right now, it’s looking more likely that, barring any shocks to the wider economy, the Base Rate is expected to be cut towards the end of 2024, and continue to edge downwards through 2025.

Though as always, this could change depending on what happens in the broader economic environment.

The next decision on interest rates will be announced at 12pm on 21 March 2024.

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