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Published 26 April 2023
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Will Mortgage Rates Continue to Fall in May?

While the markets are expecting base rate to rise in May and eventually peak at 5%, some commentators predict fixed mortgage rates could continue to fall. Learn more in our mortgage rate predictions for May.

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UK mortgage rate forecast for May

With no Bank of England (BoE) base rate-setting meeting in April, all eyes are on the next base rate announcement on 11 May in terms of mortgage rate predictions for May 2023. 

A higher-than-expected inflation reading for March will inevitably define the agenda when the BoE’s Monetary Policy Committee next convenes. On the one hand, committee members may now feel more pressure to raise rates again than if there had been a meaningful fall in inflation. But on the other hand, there could be a temptation to leave rates unchanged, and give the previous rises a little more time to have the desired effect. 

If a further base rate increase was to come, it would deal another blow to tracker type mortgage borrowers whose monthly repayments rise and fall in line with the base rate. However, how another rise would impact fixed-rate mortgages is less straightforward to predict. 

Some commentators believe there is scope for fixed rates to carry on falling, regardless of what the Bank decides. Alternatively, could it be the tipping point that sees the trend of fixed rates moving in one direction while the base rate moves in the other come to an end? 

Fixed rates continue to fall 

As has become the norm in recent months, the cost of fixed-rate mortgages has continued to fall in April – something we suggested could happen in our previous mortgage rate predictions

Data from Rightmove shows the average rates on two-year and five-year fixed mortgages fell across every loan to value (LTV) in the week to 18 April, and have done so for five weeks in a row. As a result, average rates on five-year fixed rates at 60% LTV (so if you have a 40% deposit or equity) are now 4.13%, while average two-year rates are at 4.46%. 

With the previous base rate announcement – the 0.25% increase to 4.25% on 23 March – several weeks in the past, the property portal says it is mortgage lenders “actively competing” with each other that is mainly driving the latest fixed rate mortgage reductions. 

In particular, Rightmove notes that competition between lenders has been strongest for first-time buyers, with some of the largest rate reductions coming at the higher LTV ranges which require smaller deposits. Following the latest falls, the average five-year fixed rate on 90% LTV mortgages is now 4.69% and on 95% LTV mortgages is 5.04%. 

“It’s likely we’ll see a continuation of the current trend of reducing rates in the immediate term, as lenders vie for business in the spring buying season,” predicts Matt Smith, Rightmove’s mortgage expert. 

Downward trajectory unlikely to alter 

Other commentators have also noted fixed rates are still falling and see scope for the reductions to continue into May. While five-year rates currently remain much lower than two-year rates, Justin Moy, managing director of independent broker EHF Mortgages, believes shorter-term mortgages could soon start to drop below important benchmarks too.    

“Since the last base rate increase in March, we have seen fixed rates continue to slide, especially the longer-term deals,” says Moy. “To see the two-year and three-year deals move into the same sub-4% space in May is a real possibility – we are not a million miles away.”

One thing to look out for could be a similar scenario to that seen in March, when the unexpected increase in inflation for February and subsequent hike in base rate temporarily pushed mortgage rates higher. However, the difference this time around is that inflation did fall, just not by as much as had been expected. 

“Any rise [in the base rate] could cause some small mortgage rate readjustments during the month, but it would be unlikely to alter the downward trajectory of mortgage rates more generally,” says Sarah Coles, head of personal finance at investment platform Hargreaves Lansdown. “The banks are aware that even if we do have another rise, we’re coming to the end of the rate cycle, so there’s less need to price in future rate hikes.”

Markets expect the base rate to rise 

As to what may happen to the base rate, immediately after the inflation announcement economists seem almost entirely convinced that another rate rise will now be on the way in May, and more could follow. 

Having already voted for 11 straight increases in interest rates to try to bring inflation under control, the BoE’s Monetary Policy Committee (MPC) is likely to have been hoping for a lower Consumer Prices Index (CPI) inflation reading than 10.1%. The consensus forecast was of a drop to 9.8%.  

“If there were to be evidence of more persistent pressures, then further tightening in monetary policy would be required,” the MPC members put on record in the minutes of its March rate-setting meeting. Labour market figures, which showed an unexpected rise in private sector wages, jobs growth, and a better-than-expected performing economy, could also help smooth the path towards another rate rise.

“The market is now anticipating three interest rate rises this year, which would take the Bank of England’s base rate to 5%,” says Laith Khalaf, head of investment analysis at investment platform AJ Bell. “Before the release of the latest inflation data, the expectation was we would only see one more interest rate hike, possibly two. So there has been a considerable shift in sentiment.”

Variable rate borrowers hope for different

If such forecasts become a reality, borrowers with tracker mortgages and those sitting on their lender’s standard variable rate (SVR) face more increases in their monthly repayments. The hope for those mortgage holders potentially affected is that not all commentators believe a May increase, and further rises, are a foregone conclusion. 

“In short, it’s not quite a slam dunk for a May rate hike – though markets are fully pricing that outcome now,” says James Smith, developed markets economist at financial services group ING. “We agree that it’s now probably more likely than not in light of this week’s inflation and wage data, having up until now forecasted no change. Whether the Bank goes further than that, however, we are less convinced. Markets are pricing three more rate hikes over the next four meetings, which seems extreme.”

While Coles doesn’t rule out base rate rising in May, she does point out that last year’s April energy price hike drops out of the inflation figures next month, and there is still an expectation for inflation to be much lower by the end of the year. 

“The figures are moving in the right direction, so the Bank won’t necessarily be in a hurry to raise rates,” she adds. “On balance, if we do see a rate rise, it’s likely to be a relatively modest one.”

In a scenario that most variable rate borrowers would likely welcome, Moy is hopeful that the base rate will remain untouched in May. In addition, he suggests that if inflation falls below 10% in the coming months and other factors “stay in check”, he also sees the potential for base rate to start falling at the end of the summer. 

“I would expect to see mortgage rates continue to slide throughout the rest of the year,” he says. “There may be some bumps along the way, but a relatively slow improvement, matched with an improving base rate, will hopefully give us better affordability, some price stability within the property market and, importantly, improved confidence in our sector.”

Image source: Getty Images

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