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Published 07 September 2023
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Mortgage Rates Fall as Lenders Look to Compete

Fixed-rate mortgages have been falling as inflation continues its descent and competition among lenders ramps up. Base rate predictions are lowered too. Here are our latest mortgage rate predictions.

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UK mortgage rate forecast for September 2023

There are hopes that mortgage rates could drop further in September with the slowdown in the mortgage market forcing lenders into cutting rates to attract new borrowers. However, much will still depend on the next round of UK inflation data due to be published later this month. 

Typical rates on fixed-rate mortgages fell throughout August, bringing to an end three consecutive months of rises and adding weight to predictions that rates may have peaked. And despite it being widely predicted the base rate of interest will rise again in September, some mortgage commentators believe there is scope for the cost of fixed-rate mortgages to continue to fall.

Lenders seem increasingly confident in cutting fixed rates partly based on the assumption that the recent cycle of base rate rises may soon be at an end, given that inflation in the UK now appears to be on a downward path. In addition, some lenders have been lowering mortgage rates to better compete for the attention of a smaller pool of mortgage borrowers. 

“I think we will continue to see small changes in the fixed-rate deals throughout September, although nothing of significance unless we see some disturbing inflation or output figures mid-month,” says Justin Moy, managing director of independent broker EHF Mortgages. “The base rate will continue to edge up, to 5.5% in September, possibly 5.75% in October, while inflation is still bouncing around the 6-7% mark. But I do feel the peak is very close, and competitive pressure throughout the high street lenders is helping take the edge off fixed rates too.” 

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Fixed-rate mortgages fall back

Those looking for a fixed-rate mortgage will welcome the news that rates have been falling. According to Rightmove data, average rates at every loan-to-value (LTV) it monitors for two and five-year fixed-rate mortgages ended the month of August lower than where they began. 

Some of the largest cuts were seen on five-year fixed mortgages available to borrowers with a 15% deposit or equity – 85% LTV – where average rates dropped from 6.15% at the end of July to 5.77% as at 30 August. But better deals can be had, and it was possible to find a rate as low as 5.27% by shopping around for the best mortgage lenders and deals in the last week of August. 

“While the pace of average rate drops has held steady, falls in the lowest rate available have accelerated quite significantly this week across many loan-to-value ranges, reflecting more rate cuts from major lenders and some competition for mortgage business continuing to build,” noted Matt Smith, mortgage expert at Rightmove. 

The fly in the ointment for borrowers is that fixed rates remain higher than they were a few months earlier. The average five-year fixed-rate deal at 85% LTV was 4.44% at the beginning of May and would have been even lower a year ago. 

Base rate is expected to rise again…

Many financial experts are predicting there is at least one more base rate rise, and maybe more, to come before a peak is reached. This will be a concern for borrowers with a variable rate mortgage, including tracker mortgages where the interest rate payable follows the base rate. 

In an effort to force inflation in the UK down, the Bank of England has already raised the base rate 14 times in a row. The net result is that the rate currently sits at a 15-year high of 5.25%, compared with 0.1% ahead of the first rise in December 2021. 

Even though headline inflation fell again in July, dropping from 7.9% to 6.8%, the Bank is expected to increase the base rate again when its Monetary Policy Committee (MPC) next meets on 21 September. 

There are still some causes for concern within the inflation data. For example, the Bank closely watches services inflation, which increased in July, from 7.2% to 7.4%, while core inflation, which takes energy and food prices out of the equation, was unchanged at 6.9% – a high last seen in 1992. Wages in the UK also grew by more than had been expected in the three months to June, providing another potential reason for a further rate rise in September. 

…but further fixed rate reductions predicted

However, the next round of inflation and earnings data will be published ahead of the next base rate announcement. The earnings figures are due on 12 September and the inflation figures on 20 September, the day before the MPC next meets.

In addition, some commentators believe that a notable slowdown in service sector activity in August, revealed by the latest Purchasing Managers Index (PMI) data, could lead to a pause in base rate hikes. It could be a sign of a weakening economy, and it won’t go unnoticed, providing an argument for the rate rise cycle to end sooner rather than later. This, in turn, may offer lenders the opportunity to continue lowering the cost of fixed-rate mortgages going forward. Encouragingly, some of the largest lenders in the UK have already cut their mortgage rates again in the first few days of September. 

“The PMI data has shown how worried businesses are about the outlook, and the market has immediately started pricing in two base rate rises rather than three and a lower peak,” says Sarah Coles, head of personal finance at investment platform Hargreaves Lansdown. “It’s good news for anyone looking for a new fixed rate deal because these mortgages are based on the swaps market – where banks swap a variable rate for a fixed one. Swap rates depend on rate expectations, so they’re likely to fall as expectations drop and fixed-rate mortgages may get cheaper.” 

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