At first glance, the UK mortgage market has had a very active period over the last couple of weeks. We have seen a raft of headline-grabbing rates, some dipping below 1%, which has prompted competition amongst the leading lenders. However, only after digging a little deeper will you find things aren’t as competitive as they first appear.
The last few days have also seen inflation back in focus, which could significantly impact fixed-rate mortgages in the short to medium term.
UK mortgage price war
Until recently, mortgage lender Platform, part of the Co-Operative Bank, led the way with a two-year fixed rate of 0.95%. This week has seen HSBC and TSB join the fray offering a rate of 0.94%, with others expected to follow. The last couple of months have seen several UK mortgage lenders announcing sub 1% mortgage rates. However, if there is one thing we have learnt in the world of finance, it is that the devil is in the detail.
Set up fees, deposits and other conditions
As you will see from the table below, the new 0.94% interest rate is only fixed for two years, and there are some restrictions.
| Mortgage Lender | Headline Rate | Fixed Period | Legal Fees | Restrictions |
|
HSBC |
0.94% |
Two years |
£999 |
Homebuyers/remortgagors, minimum 40% deposit |
|
TSB |
0.94% |
Two years |
£995 |
Remortgagors only, minimum 40% deposit |
|
Platform
|
0.95% |
Two years |
£1499 |
Only available via mortgage brokers, minimum 40% deposit |
Many homeowners and first-time buyers will be disappointed when looking at the details of these headline-grabbing mortgage rates. When you consider the average UK home is valued at over £250,000, a 40% deposit equates to £100,000. Whether looking to remortgage your property or a first-time buyer, not many people will have that kind of money readily available.
Looking further down the list of available rates, there is a significant difference depending upon the level of deposit you can afford.
| Mortgage Lender | Headline Rate | Fixed Period | Minimum Deposit |
| HSBC | 1.29% | Five years | 25% |
| HSBC | 3.39% | Two years | 5% |
| TSB | 1.09% | Two years | 25% |
| TSB | 3.14% | Two years | 10% – 15% |
Some mortgage lenders will offer a slightly higher rate with a no-fee deal. However, you would need to consider the fee saving against the increased interest rate over the fixed period.
Mortgage rates hit historic lows
When mortgage giant HSBC confirmed that the 0.94% mortgage rate on offer is their lowest ever, this shows the current state of the UK mortgage market. As you can see from the UK interest rate graph below, UK base rates are at their historic lows and have been around these levels for more than a decade.
UK Base Rates
Source: Trading Economics
At the moment, the graph is not indicating a change in trend in UK base rates. However, there is one additional element we have yet to discuss, inflation.
The threat of inflation
If we look back to May 2021, the Bank of England MPC expected UK inflation to top 2.5% in 2021, then fall back to 2%. However, when inflation jumped to 2.1% in June, the Bank of England adjusted its forecast, suggesting a peak above 3%. Fast forward to July; the latest inflation rate has hit a worrying 2.5%, with some experts suggesting it could peak at 4% later in the year.
Source: BBC
Under normal conditions, the Bank of England would already be putting in place staggered increases in interest rates to stifle excessive demand and rein in inflation. So, why is there no talk of an immediate rise in UK base rates?
The short to medium-term outlook for UK base rates
The Bank of England, at this moment in time, is playing a high-risk game of Russian roulette with the post-COVID recovery in the UK economy. While the signs appear to be suggesting otherwise, the Bank of England is adamant that base rates will remain unchanged in the short term.
Before the recent spike in inflation, with higher rates expected, there was a consensus that base rates would not increase until late 2023 or even 2024. Historically the Bank of England has been relatively cautious and market-led when it comes to base rates. The current strategy is seen by many as dangerous and could turn on a sixpence if inflation continues to strengthen.
If we put mortgage rates aside for the moment, increasing base rates too quickly would stall the economic recovery. However, if the momentum behind inflation continues, this only stores more severe problems for the medium-term. So, who would want to be a Bank of England MPC member at this moment in time?
Outlook for mortgage interest rates
Each time we hear the MPC comment on the outlook for the UK economy, there is always a caveat that we are in unique and uncertain times. While commendable, the Bank of England’s current strategy of holding steady against rising inflation may prove unsustainable. Consequently, it is unclear at this moment in time whether we will see any further downward pressure on headline mortgage rates.
Looking a little further afield, while short-term mortgage rates are uncertain, the medium to longer-term is a very fluid scenario. If the late 2023/2024 expected increase in base rates is brought forward, this would have a knock-on effect on medium to long-term fixed mortgage rates. The money markets are the key indicator when looking at longer-term interest rates. As of 15 July 2021, the leading money market rate (LIBOR) is indicating UK base rates will be 0.17625% in 12 months.
Is it too soon to call the bottom of the mortgage market?
Homeowners and first-time buyers will be well aware that many experts have called the bottom of the mortgage market numerous times over the last decade. The UK has faced many challenges, including the worldwide financial crisis of 2008, Brexit, and the COVID pandemic. This has had a monumental impact upon the UK economy, but recovery is in sight. While some applaud the Bank of England’s stubborn stance, others believe it is a high-risk strategy.
The LIBOR rate is a handy indicator of interest rate expectations amongst money market traders. Even if base rates were to rise in the short term, it would likely only be a gradual increase over several years. However, the first tick higher will likely prompt the end of historically low mortgage rates. Watch this space.