What effect has Bank of England Base Rate cut had on mortgage rates?

The Bank of England, which is often so far behind the curve the economy regularly laps it, did something fairly extraordinary last week: it made the right decision, reducing the base rate from 5.25% to 5%.

Yes, it was a photo finish, with five members voting for a cut and four against, and yes, Andrew Bailey went off on one during the press conference afterwards, using words like ‘modal’ that few people on the planet understand, but the ramifications for the property and mortgage markets should not be underestimated.

Sentiment is everything when it comes to bricks and mortar and the first rate reduction by the Bank of England in over four years has just given the UK’s housing market a massive boost.

Demand and activity levels were already rising in June and July as lenders consistently reduced mortgage rates, but the expectation is that the momentum in the property market will now really pick up. In short, it’s game on.

Swap rates head south

Though lenders had largely priced in the cut, what happened to ‘swap rates’ — the financial gizmos that determine how fixed-rate mortgages are priced — in the aftermath of the Bank of England’s decision was noteworthy.

They continued to decline sharply, which suggests that we are likely to see further cuts to mortgage rates in the days and weeks ahead.

After pricing in a base rate reduction in the weeks up to Thursday’s rate decision, the markets immediately got back to it and started pricing in another cut. In fact, the rate at which swaps dropped even caught some lenders by surprise.

Now we have 2-year money hovering just below the 4% level, whilst 5-year money is around 3.6%, which gives the lenders some room to really start the “Summer Sizzler” product rate war with gusto.

And this week they have done just that, with three of the top six lenders now offering 5-year fixes that start with that magical number 3.

Lenders large and small are starting to shave rates every day now. This morning we had a new lender, April Mortgages, cut its rates and now we have a high street leviathan in the Halifax following suit. All of these cuts are really starting to drive demand and the prospects for the second half of the year look very promising.

Others will surely follow, although borrowers should not get too excited. Yes rates are falling, but they will not fall too far, and those who wait for even lower rates could be disappointed as we know things can change quickly.

Also, the feeling among property market insiders is that, for the rest of 2024, the property market could really start firing. Not that it ran out of steam anyway. So waiting for further rate falls may mean having to pay more for your dream home as demand pushes property prices up.

Double-digit dipsticks

According to the latest Nationwide house price index published on Thursday, UK house prices increased by 0.3% in July, resulting in a slight pickup in the annual rate of house price growth from 1.5% in June, to 2.1% in July — the fastest pace since December 2022.

Meanwhile, Halifax house price index published this week showed that house prices increased by +0.8% in July, following three flat months, with the annual growth rate of +2.3% is the highest since January 2024.

This shows the market still had plenty of energy in it despite the General Election. Even amid the turmoil of recent years, with higher interest rates and a cost of living crisis, house prices have remained remarkably robust, leaving those who have consistently predicted double-digit falls with egg on their faces and starting to soften their words.

As we approach a period where interest rates are falling, all that pent-up demand is starting to feed through. High-demand areas where there is a shortage of properties to buy could see larger house price rises. For those looking at buying, the next few months may prove to be a good time to buy, especially when looking back in hindsight in five years’ time.

Robert Gardner, Nationwide’s chief economist, pointed out that the one thing that could undermine demand moving forward is affordability: “Affordability is still stretched for many prospective buyers. Indeed, for an average earner buying a typical first-time buyer property, the monthly mortgage payment is equivalent to around 37% of take-home pay, well above the 28% prevailing pre-Covid and the long-run average of circa 30%”.

But the initial signs following Thursday’s rate cuts are good on the affordability front.

If more mortgage lenders announce rate cuts next week, as expected, and the improvements come at higher loan-to-values, brace for a very busy end to 2024 and for house prices to continue to slowly rise.

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