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BoE Reduces Base Rate to 4.75% | What it Means for Your Mortgage
On November 7th, the Bank of England dropped the base rate to 4.75%, the second of two reductions since August.
This 0.5% total decrease is our lowest since June 2023. This could mark a turning point in the economy after the Bank of England raised the base rate 14 consecutive times between 2022 - 2023 in attempt to combat high levels of inflation.
Inflation has now dropped to 1.7%, 0.3 points below the Bank of England's target. 2% yearly inflation is an indicator of a healthy GDP, so it's likely that getting inflation back up to the target will be a focus point for the Bank of England.
For the past two years, the Bank of England has taken a hawkish stance on the base rate, but the Bank of England has now changed it's tack - reducing the bank rate in order to stimulate growth and raise inflation.
In recent months, the first products under 4% can be seen and it's likely there will be further drops in product rates towards the end of the year.
While it’s likely that interest rates won’t return to the uber-low levels we saw before 2022, five-year fixes dropping consistently across the board is certainly a sign that there are more reductions to come.
In this article, our mortgage brokers weigh in on the discussion, and we analyse the bigger picture of the UK economy, inflation, and the mortgage market in this article.
See similar: Are Mortgage Rates Going Down?
What Do Our Experts Say?
George Abouzolof
Senior Finance Broker CeMAP
Inflation has dropped below 2%, which isn’t favourable news for the UK’s economic growth. The 2% target strikes a fine balance between avoiding high levels of inflation while maintaining healthy GDP growth.
2% inflation per year is typically an indicator of a healthy economy, so it’s likely that there will be further reductions from the Bank of England to stimulate market movement. If this goes ahead, there will consequently be more affordable mortgage rates in the coming months.
There’s also a level of concern regarding rental yields, less attractive stamp duty and BTL legislation which could see a further number of landlords selling up. This could free up a number of starter homes for those waiting to get on the property ladder, but it may also put pressure on already competitive rental market.
Darcie Mackenzie
Finance Broker CeMAP
The base rate has dropped to 4.75%, which was widely expected now that inflation has dropped below the 2% target.
Lower interest rates and lower inflation mean it’s likely that we’ll see an increased level of activity in the lead-up to the holidays and beyond.
There’s definitely a level of uncertainty surrounding the government’s recent changes in the Autumn Budget and the US election. But overall, product rates have dropped across the board, and we're seeing the first offerings below 4% in three years.
It's also worth reaching out to your mortgage broker to see if there's any changes that can be factored into your application now that lower rates are available.
Read blog: Should You Get a Tracker or Fixed Rate Mortgage in 2024? & Is Now the Time to Switch?
The graph below shows how the bank rate has increased since mid-2021.
(Credit: Bank of England)
It’s clear that inflation remains a central concern for the Bank of England. Maintaining a hawkish stance on the base rate continues the affordability strain prospective buyers have been experiencing, but it’s likely that house prices won’t jump significantly amid these concerns.
Future Projections for the Housing Market
Now that the bank rate is below 5%, it's likely that mortgage product rates will follow. It's possible that we won't see significant product rates drops initially, mainly due to the economic uncertainty presented by the recent Autumn Budget and the US Election.
It's common for several legislation changes at once to cause uncertainty, which impacts lender confidence and borrowing costs, but this is usually short-lived. Once the dust settles, mortgage rates will likely see further reductions, particularly if the Bank of England base rate drops again. For homeowners and prospective buyers, this should ease monthly payments and mortgage affordability.
And on top of this, the housing market is showing signs of recovery. Increased buyer activity and improved market sentiment have contributed to modest house price increases, though affordability remains a key challenge.
As winter approaches, expect continued steady growth in house prices, followed by the typical seasonal slowdown toward the end of the year.
Related: What is a Professional Mortgage and Can You Get One? & Spring Budget 2024: 5 Key Property Market Takeaways
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How Does Inflation Influence the Bank Rate?
The country is recovering from high inflation rates that led to an elevated cost of living in 2022. The Bank of England controls inflation primarily by adjusting the bank rate, which determines the cost of borrowing across the nation. Higher interest rates mean that borrowing is more expensive, which limits economic activity.
Reduced economic activity will typically cause inflation to fall. However, it's also important that inflation doesn't fall too low. If this does happen, people may put off spending en masse in hopes that prices will drop. When spending stops completely, whole systems and companies can come to a grinding halt.
The aim is to keep inflation low and stable.
How Did Inflation Get So High?
COVID-19 caused a shortage in products and services in 2020, and this demand led to increased prices. Then, Russia’s invasion of Ukraine impacted energy and food prices. Finally, it became evident in 2022 that thousands of people had left the workforce following the pandemic. This pushed up hiring costs, and many businesses subsequently raised their prices.
These three major hits to the economy contributed to the current cost-of-living crisis. Because major events have a relationship with inflation, the long-term view on inflation is never set in stone, but experts can make an educated guess with the data they do have.
Inflation is now below the BoE's target of 2%, which many feel is the primary reason the bank has lowered interest rates. Many experts expected inflation to jump up slightly in response to increased spending after the base rate was reduced to 5%, so it came as a surprise when inflation actually dropped below 2%.
Now that the base rate has been dropped again, many experts are confident that we'll see a slight uptick in inflation and there is room for further base rate reductions in the future.
How Can You Find an Affordable Mortgage in 2024?
Despite the optimism about declining mortgage rates, deciding on the best option can be daunting and confusing.
We can help you compare mortgage products and their costs to find the best deal for your specific situation from a wide range of lenders nationwide.
Expert mortgage advisors have a finger on the pulse of the latest mortgage market news. Whether you're a first-time buyer, looking to refinance, or investing in a buy-to-let, we can help you understand your mortgage options so you feel confident you're making the right choice.
To see what we can do for you, call us at 0203 900 4322 or book an appointment below.
