Why a Base Rate Cut Won’t Necessarily Make Your Mortgage Cheaper

MFB (previously Mortgage for Business) has released a statement on why they believe ‘Why a Base Rate Cut Won’t Necessarily Make Your Mortgage Cheaper’.

It can be seen here, and it seems that while there’s anticipation for a reduction in the Bank of England Base Rate (BBR) in June, this might not directly translate to cheaper mortgage pricing. Here’s why:

  1. Base Rate History: After fourteen consecutive BBR rises from December 2021 to August 2023, the BBR has remained steady at 5.25% for eight months. Meanwhile, inflation rose from 5.4% to 11.1% but has gradually fallen since then. This decrease in inflation is seen as a positive outcome of higher interest rates, according to Andrew Bailey.
  2. Anticipated Base Rate Reduction: Many experts and economists expect the Monetary Policy Committee (MPC) to decrease the Base Rate in their June meeting. However, this may not immediately reduce mortgage interest rates.
  3. SWAP Rates: Mortgage lenders often acquire funds from money markets, and the price of these funds is based on SWAP rates. SWAP rates are influenced by various factors, including monetary policies, economic conditions, and indicators like inflation rates and GDP growth. However, mortgage rates don’t always directly follow SWAP rate movements.
  4. Lender Pricing Strategies: Each mortgage lender has its own pricing strategy. Some may adjust their rates in line with SWAP rate changes, while others may maintain their rates to protect profit margins. Additionally, lenders may adjust pricing based on business volumes and competition in the market.
  5. Current SWAP Rate Activity: SWAP rate activity in 2024 has seen fluctuations, influenced by factors like geopolitical tensions and upcoming events such as elections. This uncertainty in SWAP rates adds complexity to predicting mortgage rate changes.
  6. Impact on Mortgage Pricing: Even if there’s a BBR decrease, it might not lead to significant changes in mortgage pricing due to other influencing factors. Some lenders may factor in the reduction ahead of time, while others may wait and monitor SWAP rates.

In summary, while there’s anticipation for a BBR reduction in June, it’s uncertain how this will impact mortgage rates. It’s advisable for individuals considering refinancing to review their options now, as lenders often allow securing mortgage deals several months before the current fixed term ends. This can provide financial security against market fluctuations, and if rates decrease later, many lenders allow switching to a cheaper product.

 

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