What's happening to mortgage rates following the mini-budget reversal – MSE's analysis
Interest rates on mortgages could start falling in the next few weeks, following the Government's reversal of its mini-budget which has helped calm the financial markets. If you're looking to get a new mortgage deal soon, here's our latest analysis.
Mortgage rates have rocketed over the past few weeks, primarily a result of uncertainty caused by the Government's mini-budget in September. Currently there are no fixed-rate mortgages below 5%, something not seen in many years. The cheapest two, five and 10-year fixed-rate deals now stand at 5.64%, 5.39% and 5.09% respectively.
On Monday 17 October, new Chancellor Jeremy Hunt reversed many of the policies that shook the markets, including cancelling tax cuts and other spending plans. This has helped stabilise the factors which influence mortgage rates, and now some mortgage brokers believe rates could even start to come down over the coming weeks.
For those who are looking to get a new mortgage deal over the coming weeks and months, you need to consider whether it's best to lock into today's rate, or if you should (and can afford) to wait in the hope that rates will come down.
There are two types of mortgage deal: a variable-rate mortgage, where the rate of interest you pay can change at any time, or a fixed-rate mortgage, where the rate of interest you pay stays the same for the length of the fix.
Variable-rate mortgages, in particular tracker mortgages, are normally impacted by any movement to the Bank of England's base rate. This has risen steadily since December 2021 (currently it sits at 2.25%), meaning rates on variable mortgages have been increasing. The base rate is widely expected to rise again on Thursday 3 November, when the Bank of England next conducts its review.
Fixed-rate mortgages, on the other hand, are impacted by additional factors, such as 'swap rates', which are basically long-term interest rate predictions. A swap rate is the rate mortgage lenders pay to get the funding which allows them to offer fixed-rate mortgages to borrowers.
The cost of these swap rates is in turn heavily influenced by the value of 'gilts' – a debt issued by the UK Government. The Government sells gilts to investors as a way of borrowing money. It pays interest on this borrowing and in normal times that interest is low, because the UK is typically seen as a safe place to lend.
At the moment, thanks to high inflation, the conflict in the Ukraine, and the Government's previous plans to borrow huge amounts of money to fund tax cuts, investors have seen the UK as a less safe place to lend. This means that the 'yield' on gilts – essentially the rate of interest that investors want to compensate for lending to the UK – has soared to the highest levels since 2002, because investors see the country as a riskier borrower.
See our What type of mortgage guide for full information on the difference between fixed-rate and variable-rate mortgages.
Gilt yields have dropped – and mortgage rates could be about to fall
Following the cancellation of many of the Government's initial borrowing plans on Monday, gilt yields have started to fall. If the market remains settled, mortgage brokers expect this to have a positive impact on mortgage rates.
Mortgage broker Ray Boulger told us that he expects "to see some cheaper rates over the course of the next couple of weeks". And if the financial markets react positively to the Office for Budget Responsibility report on Monday 31 October, which will set out its forecast for the UK economy, "gilt yields might come down further".
"We are not going to see mortgage interest rates fall back to where they were five weeks ago, but there is some scope for a fall – possibly by up to 0.5 percentage points," Boulger added.
Yet another factor to complicate matters is how the market reacts to the Bank of England's base rate decision on Thursday 3 November. Many are expecting a 1% point increase in the base rate, which to some extent has already been factored into current gilt yields. However, the Bank will also give an indication of where it sees rates need to go to combat inflation in its accompanying statement – and that may have an impact on gilt yields.
My current mortgage deal is coming up for renewal – should I get a fixed or a variable mortgage?
Right now, if you're unsure about what mortgage deal to get next, seeing a qualified mortgage broker is vital. They can do the 'finding a deal' work for you and have details of most lenders' acceptance criteria, elements of which have been changing as a result of the cost of living crisis.
Plus many deals are being removed by lenders at short notice, and there are even some deals that can only be accessed via a broker. See our full help on how to find a good broker.
If you're thinking about getting a FIXED-RATE mortgage
In recent weeks, many homeowners with expiring mortgage deals have been rushing to secure new fixed rates well in advance of their current one ending, fearful that interest rates will continue to rise in the meantime.
As a result, some lenders have been extending how far in advance you can secure a new mortgage rate. See our MSE News story for full details of which lenders have been doing this, plus a rundown of the pros and cons when it comes to locking in a deal in advance.
Now with the possibility of interest rates coming down slightly, if you've got a mortgage deal that's expiring, you should consider whether it's better to wait before locking in a deal. If you've already locked into a new deal to start later but you want to get out of it, you might be able to do this penalty-free – again, our MSE News story has further details, or speak to a broker.
Ultimately, for many a fixed-rate mortgage is the way to go, as it gives both certainty as to what your mortgage repayments will be every month, and with it peace of mind.
If you're thinking about getting a VARIABLE-RATE mortgage
Alternatively, if you need a new deal but don't want to fix right now (in the hope that interest rates will come down), you could go for a variable-rate mortgage (at least temporarily), such as a tracker or discount mortgage.
Rates on variable-rate mortgages are almost always cheaper than the best fixed-rate deals. A full description of how variable-rate mortgages work can be found in our What mortgage to choose guide, but in brief they tend to fall into two different categories.
- Tracker mortgages. Here your mortgage rate tends to track a fixed economic indicator (normally the Bank of England's base rate). If this indicator – for example, the base rate – goes up, so will your mortgage rate.
- Discount mortgages. These deals usually offer a discount from a lender's standard variable rate (SVR – the rate your mortgage reverts to once your current mortgage deal ends), so if your lender's SVR goes up, so will your rate. However, standard variable rates don't always go up when the base rate increases, so such rises may not necessarily impact your costs as much.
Right now, the cheapest tracker and discount mortgages are 2.95% and 2.59% respectively.
Yet beware, as people on tracker mortgages have discovered over the past 12 months, your mortgage costs can grow significantly if the base rate goes up, as this table shows:
|When the base rate rose||Monthly mortgage repayment|
|November 2021 (0.1% base rate)||£572|
|December 2021 (0.25% base rate)||£583|
|February 2022 (0.5% base rate)||£600|
|March 2022 (0.75% base rate)||£617|
|May 2022 (1% base rate)||£636|
|June 2022 (1.25% base rate)||£654|
|August 2022 (1.75% base rate)||£692|
|September 2022 (2.25% base rate)||£731|
One bonus though is that some tracker and discount mortgages don't come with an early repayment charge (ERC), which you're typically charged if you want to leave a mortgage deal early (see our Remortgage fees guide for how ERCs work). Where it does come with an ERC, a lender might still waive this fee if you later want to move to a fixed-rate mortgage with it instead (in other words, a product transfer).
Ray Boulger told us that this could be used as an advantage if you wanted to wait until locking into a fixed-rate deal (though do check the ERC conditions of any variable-rate mortgage).
"If your ideal situation is to have a fixed rate, you could hypothetically start with a variable-rate mortgage, and switch into a fixed-rate mortgage as and when it feels appropriate," he said.
He added it was difficult to determine which wins out of a tracker and discount mortgage right now, but explained: "All things being equal, the benefit of a discount deal over a tracker is that a tracker rate is guaranteed to rise in line with base rate. If you've got a discount off SVR on the other hand, it's unlikely that banks will put up their SVR by as much, or as quickly, as the base rate.
"So although in the real world, certainty has some value, if that certainty of a tracker means you are guaranteed to see your rate increase in line with the base rate, whereas the lack of certainty with a discount means you're unlikely to see it go up as quickly, there is some value in not having certainty."
Mortgage switch help – what you need to do
- Benchmark what type of rates are out there. Our Mortgage Comparison tool will help you see what's available currently and compare it against what you're paying now.
- Dig out the details of your current mortgage. Such as... What's the rate? What type is it? When's the intro deal over? When must it all be repaid? Will you be penalised to switch deals? What's the loan-to-value (LTV)?
- Check out your existing lender's cheapest deal. This is known as a 'product transfer'. Use this rate as a benchmark to beat.
- If you've savings, use them to bag a cheaper deal. If you still owe more than 60% of your home's value on a mortgage, the more you can do to drop an LTV band, the cheaper your remortgage will be.
- Check out the size of any possible savings on our mortgage calculators. Stick your digits in here... Basic mortgage calculator – including what it'll cost | Compare two mortgages | Compare fixed-rate mortgages | 'How much can I borrow?' guesstimator
- If you're thinking of applying, it's all about whether you'll be accepted. Lenders need to check if you're 'affordable' and whether you could meet repayments if rates shot up. So see our 17 ways to boost your mortgage chances, and don't forget to Check your credit report for free. Then read up on how to Improve your creditworthiness.
- If you're serious, speak to a broker – they're currently more important than ever. See our full help on how to find a good broker.