What next for mortgage rates as much of the Mini-Budget is reversed?

House prices hit a record high in August, according to latest figures from the Office for National Statistics, with average values rising by 13.6 per cent, or £36,000 on an annual basis. However, this data looks historic given what has happened in recent weeks, with the recent economic turmoil following the mini-Budget causing mortgage rates to soar. Inevitably, many commentators expect rising mortgage rates, along with the cost of living, to have a negative impact on house price growth.

With inflation ticking up to 10.1 per cent, further interest rate rises are inevitable. However, the reversal of many of the mini-Budget provisions, apart from the stamp duty measures, has stabilised base rate expectations. A 1 per cent increase in bank rate is still expected at next month’s Monetary Policy Committee meeting but peak base rate forecasts of 6 per cent have now been lowered to around 5.25 per cent.

Subsequently, mortgage rates are expected to settle at lower levels, particularly short-term fixes, although the ‘big six’ lenders will be wary about reducing pricing too far too soon in order to manage volumes. According to Moneyfacts, the average two-year fixed-rate mortgage is 6.52 per cent, while the average five-year fix is 6.36 per cent. While these are average rates, with cheaper deals available, depending on the borrower’s deposit or level of equity in their home, this is still a significant uptick from December last year when average two and five-year fixed rates were 2.34 and 2.64 per cent respectively. There are also 900 fewer products available now, according to Moneyfacts, than on the day of the mini-Budget.

Even if fixed rates edge downwards, there are still concerns about households coming off recent low fixes as borrowers will see a significant jump in monthly payments, at the same time as the cost of living is soaring. However, there are measures borrowers can take. Firstly, they should speak to a whole-of-market broker such as Fitch & Fitch who can advise as to the best options for their circumstances. Borrowers may be able to extend their mortgage term and/or switch part of their mortgage to an interest-only basis if their lender allows this. This will reduce the monthly mortgage payments, but it is important to seek advice as these moves can have longer-term implications such as more interest paid over the long run, while provision needs to be made to pay off the outstanding capital at the end of the term.