Written by: Danny Belton - Head of Lending
Despite the Bank of England (BoE) base rate being held for the past seven months, lenders have been steadily dropping rates for a variety of products, including fixed rates and buy-to-let mortgages.
Though there are several reasons for this, the main one is inflation. Inflation has slowly been coming down over the last few months, which has led to swap rates declining. Because of this, lenders are able to lower rates for their products ahead of potential cuts to the BoE base rate.
As well as interest rates, how else does inflation affect mortgage deals?
Rising interest rates
One of the most immediate consequences of inflation is the Bank of England's response through interest rate hikes. These hikes aim to curb inflation by making borrowing more expensive, and mortgages are no different.
Currently, the base rate is sitting at 5.25%, with the BoE’s Monetary Policy Committee stating that they expect the inflation rate to drop to 2% (which is the government’s target), albeit temporarily. This means there could be good news for homeowners on the horizon this year. It is likely that lenders will continue to cut rates on mortgage products, as lower inflation will likely spell more base rate cuts, even if the decrease is a slow burn.
Reduced affordability
The combination of fluctuating house prices and high interest rates is squeezing affordability for many potential buyers. With higher interest rates, even those with good credit scores may struggle to secure a mortgage that fits their budget, potentially delaying their homeownership dreams. Fortunately, with rates dropping, this may become less of a concern.
Impact on different mortgage types
The impact of inflation varies depending on the type of mortgage. First time buyers, often reliant on higher loan-to-value (LTV) ratios, may find it particularly challenging to secure affordable deals. Buy-to-let investors, facing additional tax burdens and heightened interest rates, may also see their investment strategies impacted.
That being said, it is still more than doable, if you have the affordability, to get on the property ladder, especially with the help of an expert.
While the short-term outlook for the mortgage market remains uncertain, some experts predict a potential cooling of the housing market in 2024. This could lead to slower house price growth and potentially more favourable mortgage rates in the long run - we are already seeing lenders drop rates across the board. However, careful monitoring of economic indicators and seeking professional advice is important for making informed decisions about your homeownership goals.
Important information
Your home may be repossessed if you do not keep up repayments on your mortgage.
There may be a fee for mortgage advice. The actual amount you pay will depend on your circumstances. The fee is up to 1% but a typical fee is 0.3% of the amount borrowed.
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