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Published 02 March 2023

March Mortgage Rates May Have Room to Fall Further

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UK mortgage rate forecast for March

The last six months have been something of a rollercoaster ride for mortgage rates, making forecasts on where they may be heading next even more fraught with difficulties than usual. However, the direction of travel during March could well vary depending on the different types of mortgage.

Rates on fixed-rate mortgages have the potential to fall further in the coming month, particularly if price competition between lenders persists. As demand for mortgages has eased due to a slowdown in property sales, lenders wanting to protect or increase their share of the mortgage market have looked to reduce their rates to compete for the attention of borrowers.

For variable rate mortgages, however, the general expectation is that the Bank of England’s Monetary Policy Committee (MPC) will increase the base rate for the 11th consecutive month in March, pushing tracker mortgage rates, and potentially discount and standard variable rates, higher again.

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Sub-4% five-year fixed rates

Fixed mortgage interest rates have generally continued on a downward path in 2023, with Moneyfacts data showing the average rate on two-year fixed-rate mortgages dropped from 5.79% to 5.44% between January and February.

However, even larger reductions have been seen among five-year fixed-rate mortgages, where the average rate decreased from 5.63% to 5.20% month-on-month. Notably, banks and building societies have been launching five-year products offering rates under 4% for the first time since last September’s mini-budget.

As February progressed, the five-year rates introduced by various lenders steadily reduced further, so that on 22 February the lowest five-year fixed rate available was 3.75%. For context, at their recent high in October 2022, the average rate on offer on five-year fixed mortgages was 6.51%.

Scope for lower fixed-rate mortgages

Right now, it seems there could be scope for more rate reductions in the months ahead.

“Those looking for a fixed-rate deal may well see rates continue to fall,” says Sarah Coles, head of personal finance at Hargreaves Lansdown. “These have already backed off significantly since the peak in the aftermath of the mini-budget, reflecting the fact that rate expectations further ahead have fallen.”

How far and fast rates might drop is difficult to say. In addition, given the economic uncertainty which prevails at present, rates potentially moving higher can’t be ruled out either.

“A lot will depend on the economic outlook, so signs of strength could point to higher rates further ahead, and weaknesses could indicate more cuts,” says Coles. “We also have to factor in the Spring Budget, and that any really significant announcements could move the dial.”

Of course, recent trends also cannot be taken as a definite sign of what may come next.

The extent to which lenders wish to compete with each other for mortgage business, and undercut each other in terms of rate, can quickly change. As an example, a five-year fixed-rate mortgage, priced at 3.75%, was withdrawn within two days of its launch, after the cost to the lender of funding the mortgage increased and borrowers rushed to apply.

In a similar vein, broader economic influences can rapidly alter the mortgage pricing landscape too, as illustrated by the spike in mortgage rates within days of the mini-budget.

Why are fixed rates falling while the base rate is rising?

It may be surprising to some that fixed rates are being reduced, and further cuts are being predicted, at the same time as the Bank of England continues to raise the base rate of interest. However, this is because it is expectations about the base rate, and how inflation and other economic factors will affect its future direction, that are allowing lenders to reduce fixed mortgage rates at present.

The Bank uses the base rate to try to move inflation towards a target of 2%. As inflation in the UK climbed towards a 41-year high in 2022, it was almost certain that the base rate would need to rise across a concerted period of time in an effort to bring inflation under control.

In turn, the strong expectation of a higher base rate has allowed lenders to effectively price this into their mortgage rates in advance. This means they don’t necessarily need to increase them again if the base rate moves as expected and might even have the option to lower them, as has been happening of late.

Base rate and variable rate mortgages could climb higher

If you have a variable rate mortgage, however, it is the actual movement in the base rate, rather than the expectation of change, that affects your monthly mortgage payment. In this respect, the 0.5 percentage point increase in the base rate to 4% at the beginning of February was the 10th time in a row the Bank has opted for a rise. It also leaves the rate at a high not seen for more than 14 years.

So what can we expect from the next base rate announcement on 23 March?

The Consumer Prices Index (CPI) fell from 10.5% in December 2022 to 10.1% in January 2023, a trend which Martin Beck, chief economic advisor to the EY Item Club, said means “that the positioning of the MPC for March’s decision is still in the balance.”

The minutes of the MPC’s February rate-setting meeting, which provide an insight into the Bank’s thinking, also acknowledge that “inflation has begun to edge back and is likely to fall sharply over the rest of the year. The Bank’s latest forecast is for the base rate to rise to around 4.5% in mid-2023, a lower peak than previously anticipated.

At the moment, it’s possible that another rise in the base rate could be on the cards, albeit a smaller one than the uplift made in February.

But it’s important to note that the Bank points out that its outlook carries “considerable uncertainties”. The seven weeks between the MPC’s last announcement and the next means there is certainly ample time for the outlook to change.

Image source: Getty Images

About the Author

Tim Leonard

Tim is a writer and spokesperson at NerdWallet and holds the Chartered Insurance Institute (CII) Level 3 Certificate in Mortgage Advice. He has over 20 years’ experience writing about almost…

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