Financial markets have factored in a 60% probability of a mortgage interest rate cut on Thursday, with industry leaders optimistic that lower borrowing costs could stimulate home sales. According to the Bank of England, the UK saw a “broadly stable” number of mortgage approvals last month. Official figures released on Monday, July 29th, show that there were 59,976 net approvals in June, a slight decrease from May’s 60,134. Additionally, net mortgage borrowing rose from £1.3bn in May to £2.7bn in June.

This data precedes the Bank’s upcoming interest rate decision on Thursday. Analysts believe these figures indicate a “strong foundation” for continued growth in the housing market, which seems largely unaffected by the recent general election. However, they warn that much will hinge on the anticipated rate cut later this week.

Improved Mortgage Offers on the Horizon

Industry experts are optimistic that a decrease in borrowing costs will stimulate home sales, as more attractive mortgage deals entice potential buyers. Despite interest rates being maintained at 5.25% for seven consecutive periods, financial markets now predict a 60% likelihood of a rate cut on Thursday, up from last week’s 46%.

Recently, Nationwide became the first major lender to offer a mortgage deal below 4%, followed by reductions announced by Barclays and TSB the next day.

Chief executive of easyMoney Jason Ferrando said:

Bank-rate decision pending

Lucian Cook, from estate agent Savills, said:

Alice Haine, from investment platform Bestinvest by Evelyn Partners, said:

Experts think cuts could accelerate if inflation statistics this week are lower than projected. Multiple mortgage lenders, including Santander and TSB, are dropping rates again as price cuts continue.

Starting today, Santander is lowering fixed rates by up to 0.14 percentage points and tracker rates by 0.15 percentage points.

TSB has announced up to a 0.2 percentage point reduction in residential and buy-to-let mortgage rates. Last week, Virgin Money and Clydesdale Bank dropped their usual variable rates by 0.25 points, and Virgin also introduced limited-edition special rates that will be available until Monday, July 22.

MPowered Mortgages, a small lender, is also lowering rates for the second time in a week, having already done so last Thursday. It slashed two-year fixed rates by up to 0.15 percentage points last week and by an additional 0.3 points today.

Meanwhile, the Yorkshire Building Society is lowering interest rates by up to 0.25 percentage points, the second drop in two weeks.

The reductions come after weeks of downward pricing by lenders ahead of a probable Bank of England interest rate drop next month.

Rates are gradually lowering across the board. Two weeks earlier, the average two-year fixed mortgage was 5.97%, while the average five-year fixed mortgage was 5.53%.

However, following multiple decreases, including those from large lenders such as Halifax and Nationwide, the averages are currently 5.91 percent and 5.49 percent, respectively, according to Moneyfacts.

Experts expect mortgage rates to fall further, with brokers anticipating rates below 4% for individuals with the largest deposits or equity within weeks.

Aaron Strutt of Trinity Financial said:

However, the timing of rate decreases could be determined by whether inflation falls as forecast on Wednesday.

Elliott Culley of Switch Mortgage Finance had the following to say:

Other experts feel the base rate decision has little bearing on whether lenders decide to decrease rates.

Jane King, a mortgage broker from Ash Ridge, has said the following:

Mortgage rates often follow swap rates, which are based on long-term forecasts of what will happen to the Bank of England base rate, but they can also be impacted by banks’ desire to attract business if more people want to buy homes.

The Bank of England’s base rate is expected to fall in 2024, most likely in August or September.

However, higher-than-expected inflation data between now and then could delay the chances of a rate cut in the near future, perhaps raising mortgage rates again.

The average monthly payment has increased by 61% since 2019, prompting borrowers to choose for smaller properties or longer loan periods.

Since the last general election, the monthly mortgage cost for first-time buyers has increased by more than 60%, now over £1,000 per month, illustrating the financial barriers for Britons seeking to own a property.

According to Rightmove data, the average mortgage payment for first-time buyers in Great Britain has climbed by 61% over the last five years, rising from £667 in 2019 to £1,075 per month.

The escalation of house prices and interest rates, which have significantly burdened borrowers, is responsible for this rise of approximately £400 a month. Meanwhile, average wages have only risen by 27% in the same timeframe. Consequently, many young borrowers are being compelled to either downsize their property choices or commit to ultra-long mortgages.

Tim Bannister, a Rightmove property expert, had the following to say:

The calculations assumed several factors: first-time buyers would provide a 20% down payment, secure a 25-year mortgage term, and opt for a five-year fixed-rate mortgage at the average interest rate.

The average price of a first-time buyer’s home in Great Britain has climbed to £227,757, marking a 19% increase since 2019. Regionally, the north-west experienced the largest surge in first-time buyer home prices, rising 33% since 2019 to £177,588. London remains the most expensive, with prices increasing by just 6% but now averaging £507,049.

Bannister is calling on the next administration to establish “well-thought-out policies” to help first-time buyers overcome the obstacles of saving for a large deposit and qualifying for a mortgage.

The party manifestos include several initiatives aimed at helping first-time buyers. The Conservatives plan to make the current £425,000 stamp duty threshold permanent for this group and promise an enhanced help-to-buy programme for those with smaller deposits. Labour proposes a “permanent, comprehensive mortgage guarantee scheme” to extend the current support for banks offering 95% home loans.

This comes just after the Bank of England kept interest rates at 5.25% for the seventh straight year, keeping borrowing costs high. According to the Resolution Foundation, millions of homeowners have faced significantly higher refinancing rates over the last 18 months, with a total cost expected to reach £12 billion by the end of the year.

A Bank of England survey revealed that 50% of investors expect a rate cut at the August monetary policy committee meeting, with 75% predicting a cut in September.

Furthermore, recent information suggests that average UK incomes fell slightly in May, the first drop since October 2023, as the labour market slowed ahead of the election. According to the Adzuna monthly jobs survey, the average advertised wage dropped to £38,765 in May, down £45, or 0.11%, from April. The number of job openings remained largely steady, at 854,248.

The Adzuna monthly jobs report says the following:

Are you a Nationwide or Santander mortgage holder? Well, brace yourself; you’ve got a shorter window now to secure a new rate before your current deal expires. The previous six-month period for locking in a new rate has shrunk to just four months. This change means you have less time to safeguard against potential rate hikes before your existing mortgage term ends. Fixed mortgage rates have been climbing steadily this year, although there’s speculation about a base rate cut looming on the horizon.

In the past, almost every UK mortgage lender allowed existing borrowers to lock in a new rate up to six months before their current deal ended, thanks to the government’s “mortgage charter” introduced in June 2023. This initiative aimed to offer borrowers more flexibility during a period of volatile mortgage rates.

Nationwide and Santander, however, are bucking the trend by shortening this window from six months to four. They attribute this change to a perceived stabilisation in the mortgage market and a lack of borrowers opting for early rate locks. Before the 2022–23 period, a four-month product transfer window was the norm. Ray Boulger, from broker John Charcol, commented: “With the rate frenzy calming down, it’s reasonable for lenders to reassess the product transfer window duration.”

This adjustment comes amid a continued rise in fixed mortgage rates throughout much of 2024, though they seem to have reached a plateau for now. Currently, two- and five-year fixed deals are starting at 4.78% and 4.31%, respectively. While a drop in fixed mortgage rates could follow a cut to the Bank of England’s base rate, currently at 5.25%, such a decrease is not widely expected at the upcoming base rate meeting on June 20.

Need a new mortgage? Use our mortgage calculator to see the best new rates on the market.

Commencing the mortgage-switching process: A strategic move

As your mortgage deal approaches its end, it’s prudent to take action early. Failing to secure a new rate in time could mean transitioning to your lender’s standard variable rate (SVR), a move that could see you facing interest rates ranging from 7.5% to 8.5%.

Fortunately, as discussed earlier, you can typically secure a new rate up to six months before your current one expires. This applies whether you opt for a product transfer with your existing lender or a remortgage with a different one. Locking in a new deal ahead of time not only shields you from the burden of an expensive SVR but also serves as a hedge against potential interest rate hikes. Should rates climb during this interim period, you’ll have locked in a more affordable deal. Conversely, if rates drop, you often have the flexibility to switch to a better deal without incurring penalties, securing a lower rate closer to your deadline.

Key considerations when locking in early

Before finalising a new mortgage deal ahead of schedule, whether through a product transfer or remortgage, it’s essential to consider the following:

• Upfront Fees: Determine if you’re required to pay fees upfront to secure the rate. Such fees could limit your ability to switch to a better rate, penalty-free, if a superior offer arises later on.
• Ditching Period: Be aware of any stipulated timeframe within which you’re allowed to cancel the deal without penalty. Most lenders impose a cut-off period, typically 14 days or less, before the new rate takes effect.
• Concurrent Mortgages: Avoid the pitfall of inadvertently having two mortgages set to commence simultaneously. This scenario may arise if you secure a new rate with your existing lender but then opt for a different deal elsewhere without cancelling the initial arrangement. Failure to rectify this oversight in a timely manner could result in substantial early repayment charges, potentially costing thousands of pounds.

By proactively navigating these considerations, you can maximise the benefits of locking in a new mortgage deal early, ensuring financial prudence and peace of mind as your current arrangement draws to a close.

In the UK, where homeownership is deeply embedded in the cultural fabric, mortgages play a crucial role in enabling individuals and families to achieve their property dreams. However, the intricate world of mortgage finance can be a daunting maze to navigate, often shrouded in jargon and complex procedures. This blog post aims to demystify mortgage finance, providing a comprehensive overview of how mortgages are financed in the UK.

The essence of mortgage finance

At its core, mortgage finance is the mechanism through which individuals borrow funds from financial institutions, such as banks or building societies, to purchase or refinance a property. The borrowed amount, known as the principal, is repaid over an extended period, typically 25 years, with interest accruing on the outstanding balance. This interest, paid regularly in the form of monthly mortgage payments, constitutes the lender’s compensation for providing the loan.

The mortgage lenders: the powerhouses of mortgage finance

A diverse array of financial institutions serves as mortgage lenders in the UK, each with its own unique lending criteria and product offerings. These lenders play a pivotal role in the mortgage finance ecosystem, ensuring the availability of funds for homeownership aspirations.

The mortgage process: a step-by-step journey

Securing a mortgage involves a multi-step process, designed to assess the borrower’s creditworthiness, affordability, and the suitability of the property as collateral. The typical mortgage process in the UK can be summarized as follows:

• Credit check: Lenders examine the borrower’s credit history to determine his or her ability to repay the loan. Checking credit reports, debt levels, and payment history are all part of this process.
• Affordability assessment: Lenders look at the borrower’s income and expenses to make sure they can afford the mortgage payments. This includes going over income statements, employment information, and living expenses.
• Property valuation: A surveyor determines the market value of the property to determine the maximum loan amount the lender is willing to provide. This ensures that a valuable asset is used to secure the loan.
• Mortgage offer: Following approval, the lender makes a formal mortgage offer outlining the loan terms, including the interest rate, repayment schedule, and any special conditions.
• Legal formalities: Solicitors handle legal aspects like conveyancing and title checks to ensure a smooth property transfer and to protect the interests of both parties.
• Completion: The property is purchased and the mortgage becomes active once all formalities are completed. The borrower begins paying the lender regular monthly mortgage payments.

Types of mortgages: tailored to diverse needs

The UK mortgage market offers a variety of mortgage types, catering to individual financial situations and preferences:

• Fixed-rate mortgages: These mortgages offer the security of a fixed interest rate for the duration of the loan, resulting in predictable monthly payments.
• Variable-rate mortgages (VRMs): VRMs have lower initial interest rates but are subject to market fluctuations, which can affect monthly payments.
• Tracker mortgages: Tracker mortgages closely track a benchmark interest rate, such as the Bank of England base rate, with monthly payments adjusting as a result.
• Offset mortgages: By linking a savings account to the mortgage, the interest payable is reduced by offsetting the mortgage balance with the savings balance.

Funding sources for lenders: the backbone of mortgage finance

Mortgage lenders obtain funds to provide mortgages from various sources, including:

• Retail deposits: Deposits made by customers into a bank or building society accounts form a significant portion of mortgage funding.
• Wholesale funding: Lenders borrow funds from other financial institutions, such as investment banks or money market funds.
• Capital markets: Lenders issue bonds or other securities to raise funds in the capital markets.
• Government-backed schemes: Certain government-backed schemes, such as Help to Buy, provide additional funding options for borrowers.

The regulatory framework: ensuring transparency and consumer protection

The Financial Conduct Authority (FCA) regulates the mortgage industry in the UK, ensuring transparency, fair lending practices, and consumer protection. The FCA’s regulations cover aspects such as affordability assessments, mortgage advertising, and complaint handling.

Conclusion: empowering homeownership dreams

Mortgage finance is critical to enabling homeownership and contributing to a stable housing market in the United Kingdom. Individuals who understand the complexities of mortgage finance can navigate the mortgage journey with greater confidence, making informed decisions that pave the way to achieving their homeownership goals. Remember to seek professional advice from independent financial advisors or mortgage brokers as you begin your mortgage journey to tailor a mortgage solution that aligns with your financial goals and circumstances.