Mortgage brokers said the current high cost of fixed rates was set when markets expected aggressive future hikes in the key rate to offset soaring inflation, but those expectations had already receded before the BoE signaled a riskier outlook for interest rates in in the wake of the latest rate hike on Thursday. Simon Gammon, managing director at mortgage broker Knight Frank Finance, said: “We expect fixed rates to continue to ease slightly — they are still overpriced because lenders don’t have the appetite for many fixed-term loans at the moment. but with a period of stability, you can expect that to change.” David Hollingworth, director of L&C Mortgages, said: “Lenders could see their way to cutting fixed rates back a bit. There is more room for them to do that.” The MPC sharply raised key interest rates on Thursday by 0.75 percentage points to 3%, but BoE governor Andrew Bailey suggested markets had missed their forecasts for future rises, which weigh on mortgage pricing, and said that lenders had to reflect this in their mortgage pricing. “[The Bank rate] it should go up less than it is priced in the financial markets today,” Bailey said in comments after the announcement. “This is important because, for example, it means that interest rates on new fixed-term mortgages should not rise as they have.” Lenders said the cost of fixed-rate mortgages would come down, but warned it would take time. A senior bank executive said: “I think it’s more likely that we’ll see longer-term interest rates moderate. Over time, hopefully it will bring mortgage rates down a bit — but it will take some time to filter through and for expectations to shift.” Recommended Another executive at a major UK lender suggested that fixed mortgage rates of 1 or 2 per cent, as they were last year, were a thing of the past. “We expect in a few weeks and months to see fixed rates start to come down, but consumers will almost certainly get rates higher than what they’ve locked in,” the person said. Lenders’ funding costs for their fixed-term mortgages are affected by swap rates, which shot up on September 23 when the Liz Truss government’s “mini” budget spooked markets and raised government borrowing rates. Two-year swap rates then fell below 4.5% on the eve of the “mini” budget as markets welcomed the decision by new prime minister Rishi Sunak and chancellor Jeremy Hunt to roll back most of his measures. But while swap rates and interest rate expectations have calmed, mortgage lenders have so far only made small cuts to their nominal rates. “People who are now in the process of getting new fixed-rate or conversion mortgages should obviously get these terms,” Bailey said. In July, the BoE said 40% of fixed-rate mortgages would mature in 2022 or 2023. Two-year fixed mortgages peaked at an average of 6.65 per cent on October 20, according to finance website Moneyfacts, up from 4.74 per cent before September’s budget announcement. The average interest rate for a two-year fixed deal had fallen to 6.46 percent on Thursday. Five-year fixed rates averaged 4.75 per cent on the eve of the ‘mini’ Budget. They rose to 6.51 percent on Oct. 20 and fell back to 6.3 percent by Thursday. While fixed-rate mortgages are protected from fluctuations in the prime rate for the duration of their repayment, those with variable rates including tracker, discounted variable or standard variable rates face a more immediate impact from Thursday’s rate rise, the which was the largest in the last 30 years. Lenders’ standard floating rates, which tend to reflect changes in the BoE’s key rate, have risen to 6.49 percent from a standard 3.59 percent in December 2021, when the BoE began a series of rate hikes. according to L&C Mortgages. If lenders eventually pass on Thursday’s rise to their standard floating-rate borrowers, it would mean an extra £5,076 in extra annual mortgage payments for someone with a £250,000 mortgage compared to early December last year, the broker estimated.
