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Published 28 June 2023
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Base Rate Hike Suggests More Mortgage Rate Rises to Come

A larger-than-expected rise in the base rate in response to inflation failing to fall could spell more bad news for mortgage borrowers. Here are our latest mortgage rate predictions.

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UK mortgage rate forecast for July 2023

Mortgage borrowers are facing the prospect that mortgage rates may continue rising in July, carrying on the trend seen in recent months. With the Bank of England’s Monetary Policy Committee (MPC) increasing the base rate of interest from 4.5% to 5% on 22 June, variable rate mortgage borrowers have been dealt another blow, and mortgage lenders may have little choice other than to carry on hiking the cost of fixed rate mortgages. 

There could be worse still to come for mortgage holders. Immediately after the base rate moved to a 15-year high, the financial markets were predicting another rate increase when the MPC meets next in August, and suggesting more rises could follow after that.     

“The fact that the Bank has delivered such a big hike will cement the market’s conviction that more rises are on the cards, and that’s going to filter through into even more painful rises in mortgage rates,” says Sarah Coles, head of personal finance at investment platform Hargreaves Lansdown.  

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Base rate predicted to peak at 6%

Our previous mortgage rate prediction suggested that the base rate was likely to rise again in June, mainly because inflation had come in higher than expected in April, and in the two months before. 

What wasn’t widely predicted by many financial commentators was that the rate would eventually increase by half a percentage point rather than a quarter. However, figures released the day before the base rate announcement showed Consumer Prices Index (CPI) inflation remained unmoved at 8.7% in May. Meanwhile, core inflation – which removes food, energy, tobacco and alcohol prices from the equation –  increased to a 31-year high. As a result, the Bank felt a larger uplift in the base rate was warranted.    

“Going into this rate rise markets were 60:40 split in favour of a rise to 4.75% versus an increase to 5%,” says Laura Suter, head of personal finance at investment platform AJ Bell. “The immediate market reaction after the rate increase showed a shift to more expecting rates to peak at 6% and for that peak to come in November rather than December or early next year. So higher rates and a faster move to that peak. This is not the news the nation’s mortgage holders wanted.”

Fixed rates have been rising 

Given average fixed-rate mortgage rates have increased across the board in June, and have generally been rising since the start of May, the prospect of further rises certainly won’t be welcome. According to Rightmove, average rates at every loan-to-value (LTV) it monitors for both two and five-year fixed rate mortgages will end the month far higher than where they started it, and, as at 27 June, are all above 5% – some are now even higher than 6%. 

For those with a 25% deposit or a similar amount of equity in their home, the average rate on two-year fixed rate mortgages at 75% LTV has increased to 5.77%, up from 4.79% just four weeks earlier. At the same time, the equivalent five-year fixed rate has increased to 5.36%, from 4.43%.

Unsurprisingly, those with smaller deposits, such as first-time buyers, have seen the cost of the mortgages they’d typically need rise sharply too. For a 95% LTV mortgage requiring a deposit of 5%, the average two-year fixed rate has jumped to 6.62%, up from 5.74%, while a typical five-year fixed rate has increased to 5.87%, from 5.27%.

If you have a fixed-rate mortgage, your monthly repayments will remain the same for as long as you’re within your fixed rate period. However, if you need to remortgage because your fixed rate is about to expire – as will happen to 800,000 borrowers before the end of the year – it’s almost certain the new deals you’re looking at will have higher mortgage rates than what you’re used to.  

More pain for variable rate mortgage holders

With the base rate having now increased 13 times in a row, if you currently have a variable rate mortgage you’re probably all too aware of what the latest rise means for you. For those with a tracker mortgage, where your interest rate automatically follows movements in the base rate, you can expect your monthly repayments to increase almost straight away. 

If you’re currently on your lender’s standard variable rate (SVR) – the interest rate you’re moved onto when an initial fixed rate period comes to an end if you don’t remortgage to a new deal – your repayments are likely to go up too. It’s not definite, because lenders set their own SVRs and can change them as they wish, but generally they will follow the base rate. Some lenders increased their SVRs on the same day of the base rate announcement, and it would be unusual if others did not follow. According to Moneyfacts, the average SVR stood at 7.52% on the day the June decision was announced, so this rising near to or above 8% in the coming weeks isn’t beyond the realms of possibility. 

Will the base rate rise again in August? 

Given the sharp focus on the cost of mortgages at present, thoughts are already starting to turn to the next Bank of England announcement on 3 August. But while the current market expectations are for the base rate to peak at 6%, that doesn’t necessarily mean an increase has to come at the next meeting. 

“The fact that the MPC has now got ahead of market expectations (which had erred towards a 0.25 percentage point rise) may give it leeway to skip what had been a widely-expected further rate rise when the committee meets next in August,” says Martin Beck, chief economic advisor to UK economic forecast group the EY ITEM Club. “With headline inflation expected to come down noticeably over the next few months, there could be further rationale for a pause.”  

Other financial commentators believe another rate rise could still be on the cards for August, but doubt it will be on the same scale as in June. Some are also wondering whether the markets may be pricing the peak too high. 

“It’s clear that until we begin to see some improvement in the official inflation statistics, the committee won’t be content with pausing,” says James Smith, developed markets economist, and Chris Turner, global head of markets and regional head of research for UK & CEE at financial services group ING. “We’re tempted to say that today’s 50 basis point move won’t become a new trend, but two further 25 basis point hikes seem like the most likely route after today’s meeting.”

Image source: Getty Images

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