Base interest rates increase

February 7, 2023

While the base interest rate saw another increase, fixed-rate mortgage deals are continuing to fall as the lending sector finds stability.

On Thursday 2nd February, the Bank of England increased the base interest rate by 0.5% to 4.0%, which is a 14-year high. This is the 10th consecutive increase as the Monetary Policy Committee continues to try to bring down inflation.

However, a rise in the base interest rate doesn’t automatically mean fixed-rate mortgages will go up straightaway. This increase was widely anticipated, and stability and calm has been returning to the mortgage market.

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Mortgage rates and products

Two-year fixed-rate mortgages are currently falling by 0.35%, while five-year deals are dropping by 0.43%, according to Zoopla. This is offering confidence to those who are looking to take out a mortgage or remortgage.

While the base interest rate has increased by 1.0% since the end of October, the cost of fixed-rate mortgages has fallen by 0.9% during that time. This shows that rates have been gradually reducing, and they are actually expected to keep going down.

This is due to the increased stability compared to the period after the mini-budget proposals, which were announced in September. At that time, lenders withdrew a number of mortgage products, but availability has been improving ever since. There is growing competition among lenders, which will mean more choice and availability of products.

Rightmove’s mortgage expert Matt Smith commented on the current state of the mortgage sector: “The mortgage market is now looking more positive compared to the last three months of 2022, which should give people more certainty and confidence ahead of the traditionally busy spring home-moving season.

“There’s some good news for buyers, as lenders are competing for business and have been reducing their rates further in January. Most five-year, and many two-year fixed-rate deals are now being offered below 5%, compared to more than 6% at their peak in October last year.”

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Base rate predictions

Following the latest announcements, economists are expecting the base interest rate to peak at 4.25% or 4.50%, and after that, the rate could start to come down. The base rate is not expected to reach the highs that were first predicted in the aftermath of the mini-budget.

Additionally, there was further positive news as the Monetary Policy Committee shifted its language. They said there would be further rises to interest rates if there was evidence of persistent inflationary pressure. This contrasts dramatically to its previous statements, saying it would take the necessary actions and respond forcefully to get inflation down to its target.

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Increased economic stability

While the UK could still enter a recession this year, the Bank of England has said it will be shorter and less severe than previously thought. The bank also forecasts that the inflation rate will continue to slow this year.

The latest figures show inflation sits at 10.7%, and it appears to be on a downwards trend. Inflation is expected to fall to around 4% by the end of this year. There is much greater economic stability now compared to autumn last year, which is having a positive impact on the mortgage market and the housing sector as a whole.