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Published 01 May 2024
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Mortgage Rates Begin to Rise as Base Rate Delay Predicted

Higher mortgage rates could be on the way as market expectations realign to the first base rate cut coming in August. Here is our latest mortgage rate forecast.

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UK mortgage rate forecast for May 2024

A period of rising mortgage rates could be on the cards amid concern that a cut in the Bank of England base rate of interest may be further away than previously anticipated. 

Predictions that the Bank may delay lowering the base rate, to ensure that inflation continues heading in the right direction, follow a smaller-than-expected fall in inflation in March. 

This time last month, before the inflation figures were known, the financial markets and many experts were expecting the first base rate cut to happen in June. Now investors think it’s most likely to be August before the rate starts coming down. In addition, whereas three separate cuts had been anticipated before the end of 2024, the latest forecasts suggest there will now only be two. 

A knock-on effect has seen a rise in the costs lenders pay to fund their mortgage loans. In turn, lenders are passing the higher funding costs onto borrowers, in the form of higher mortgage rates.    

“The market had pencilled in a cut [in the base rate] for June, but inflation is proving stickier than expected around the world, so expectations have been pushed back to August, or even September. The mortgage market is adapting to these changing expectations,” Sarah Coles, head of personal finance at investment platform Hargreaves Lansdown, told NerdWallet in an email. 

Fixed-rate mortgages move higher 

Three major mortgage lenders made their moves around a week after the inflation announcement. Barclays, HSBC and NatWest each increased the rates on various fixed-rate mortgage products on the same day. Several other banks and building societies followed suit, including more major lenders in Nationwide and Santander (and NatWest again), a week later. 

As a result, on 1 May, the average rate on five-year fixed-rate mortgages stood at 4.97%, a notable increase from 4.84% just two weeks earlier. The rate had barely changed for six weeks before. It is also the highest figure shown by the Rightmove data since 3 January, when the average was 5.02%, and means typical rates on fixed-rate mortgages are getting close to where they were at the start of the year.

Mortgage rates had dropped sharply during January, giving borrowers hope that 2024 would deliver notably cheaper mortgage costs. Frustratingly, rates then headed higher throughout February and early March, before a period of relative market stability emerged. There were predictions in April that mortgage rates could soon start to fall. But instead, the calm has been broken by rates rising rather than coming down. 

“Now the banks expect rates to be higher for longer, and are forecasting fewer cuts this year, they’re bumping up mortgage rates,” explained Coles. “This [rate increase] isn’t a massive change, but it’s moving in the wrong direction for those who need a new mortgage.”

Base rate cut expected in August

When that direction might change is the question borrowers would like answered. As ever, much rests on the progress of inflation towards its 2% target. The March reading of 3.2% meant consumer prices inflation did slow compared to the figure of 3.4% seen in February. Extra doubt has crept in around when the base rate may start to fall because the markets were expecting to see a slightly larger drop to 3.1%.

The good news is that the governor of the Bank of England, Andrew Bailey, did not seem overly concerned. Shortly after the figures were announced, Bailey said “we are actually pretty much on track for where we thought we would be.” He also predicted “quite a strong drop” would be seen in inflation for April. 

The next base rate announcement is on 9 May, when it seems almost certain that the rate will be kept on hold at 5.25% for the sixth meeting in a row. It is the minutes of the rate-setting meeting itself that are likely to prove more interesting, for the insight they give into the latest thinking of policymakers. 

Currently, August is when the markets think it’s most likely the first cut will arrive, although there are plenty of commentators who still consider a June cut to be a possibility, too. The next set of inflation data, scheduled for release on 22 May, will be crucial in shoring up arguments either way, or perhaps in taking them in a different direction again. 

Inflation key to mortgage rate direction

Ultimately, barring unforeseen surprises, it should be remembered that the next move in the base rate is still expected to be down, and for that to happen this year. 

If and when the rate does fall, it will bring some relief to those with tracker mortgages and on a standard variable rate, both of which typically follow the direction of the base rate. In terms of fixed-rate mortgages, it is the expectation of what is likely to happen with the base rate, and when, that plays a big part in the rates lenders offer. 

“This isn’t going to last forever,” said Coles of the recent fixed-rate mortgage rises. “Once the data starts showing inflation is under control, we can expect the Bank of England to make a move, and for mortgages to start easing again. Unfortunately, there are no guarantees over how long this could take.”

Image source: Getty Images

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