Market News: Interest Rates To Fall Below 4% in 2023

The Rise and Fall of Interest Rates

The Rise of Interest Rates

Mortgage rates had risen during a time of political instability in the UK when the September mini-budget was announced, which caused inflation. This was due to a declaration of unsustainable loans and tax cuts. This led to lenders immediately withdrawing over 40% of available mortgages.

Bank of England raised base interest rates to a height of 3% because inflation is too high. However, while the Bank of England’s base rate has increased, mortgage rates have started to reduce. In October 2022, mortgage rates were raised to an average of 6.55% for a two-year fix, according to Moneyfacts.

Another factor was increased market activity, with mortgages in high demand there are a huge number of applications in circulation. Lenders have been working hard to keep up with demand. However, they have had to increase mortgage rates to reduce pressure.

The Fall of Interest Rates

Interest rates are now expected to drop below 4% in 2023. This is 1.5% lower than previously forecasted. For investors, this could signal more flexibility in lending options moving forward.

After the response to the mini-budget, the decision was soon reversed, and a new government was formed. When Rishi Sunak became the prime minister, the economy stabilized. Interest rates have been steadily dropping since the new cabinet was instated.

Mortgage Bankers Association has claimed that since the rise in interest rates, the number of mortgage applications from first-time buyers has dropped a total of 21% year-on-year. This is a trend expected to continue and should see interest rates continue to decline. The decrease in activity is also a result of high inflation, increased cost of living and the end of the help-to-buy scheme.

What Mortgage Options Are Available?

Fixed rate: A fixed rate mortgage deal is a set interest rate which is usually available for 2 or 5 years. Having a fixed rate mortgage gives buyers peace of mind, knowing each payment will be the same. This allows the landlord to budget far easier and be secure in the knowledge that the rental income will cover the mortgage and interest.

Standard Variable: A standard variable mortgage deal is usually the most expensive on the market. A lender can decide to change the cost with little to no warning, making it hard to budget for. This is the default mortgage option which allows the buyer to switch with no exit fees.

Discount Variable: A discount variable mortgage deal usually last up to 2 years with a discount below a lender’s standard variable rate. For example, if a lender offers a -1% discount and their standard rate is 4% the buyer would pay 3%. Once the discount variable period ends, the buyer will be moved back to a standard variable deal.

Tracker: A tracker mortgage typically follows the Bank of England’s base rate with an additional 1.5%. This means if the Bank of England had a base rate of 0.1 then the interest rate on this deal would be 1.6%. However, if the Bank of England increased their base rate to 3% buyers would pay 4.5% interest.

For more information on buy-to-let mortgage options, download the CityRise Definitive Guide to Buy-to-Let Mortgages, here.