Market News

BY  Amber Murray

Analysts have predicted that the Bank of England’s decision to reduce interest rates on Thursday will encourage major banks to cut mortgage rates.

Lower rates will be a major affordability boost for the UK’s housing market, which continues to price out young buyers unable to rely on financial gifts or savings.

“If homebuyers can borrow more, they most likely will,” RBC analysts Anthony Codling said.

Codling estimated that a one per cent cut in mortgage rates has a similar impact on affordability as a 10 per cent fall in house prices.

“Mortgage rates may be one of the few beneficiaries of uncertainty on the outlook for global trade,” he added.

Jatin Patel, head of mortgages at Barclays, said that the Bank of England’s decision has brought “further optimism” to the housing market.

“With mortgage rates dipping below four per cent, as well as a lower energy price cap on the horizon, there are positives to be found amongst current market turbulence,” Patel said.

HSBC, Barclays and Lloyds all cut rates below four per cent in April, and Lloyds – which covers Halifax, Bank of Scotland and Lloyds Bank – eased its affordability calculations to enable an extra £38,000 for borrowing.

“[The rates cut] will fuel the property market momentum that has been building over much of the last year and, with interest rates now trending downwards, we can expect to see homebuyers acting with an even greater level of confidence over the coming months,” chief sales officer for Foxtons, Jean Jameson, said.

“With a greater degree of mortgage affordability fuelling the market, it’s looking to be a very positive year and the expectation is that house prices will continue to hold firm on their current upward trajectory,” Jameson said.

House prices unexpectedly rose 0.3 per cent in April. Estate agents had anticipated a fall following the end of the stamp duty holiday, but buyers were buoyed by sub-four per cent mortgage rates.

A note of caution on mortgages rates

Not all analysts, however, are convinced the lower interest rate will lead to lower mortgages in the immediate term.

One cause for wariness is the UK’s 10-year swap rate, on which fixed-term mortgage rates are based.

A swap rate is a rate based on what the markets think interest rates will be in the future, and a higher swap rates in general means that a higher fixed mortgage rate.

The swap rate ticked up by just under 0.1 per cent after the Bank of England’s decision, “probably due to the split vote”, according to head of investment analysis at AJ Bell, Laith Khalaf.

Five members of the committee voted to cut rates to 4.25 per cent, two voted in favour of a larger reduction to 4 per cent and two voted for no change.

“[The split vote] may well put a cork in the flurry of mortgage rate cuts we have seen in recent weeks, though some lenders may still have cuts in the pipeline yet to be announced. Variable rate mortgages can still be expected to fall, however,” Khalaf said.

“Lenders may also be looking at the economic picture, in particular the potential for unemployment to rise,” he added.

The rise in swaps may be a temporary blip due to uncertainty, however. The rate has been trending down this year – it was 4.26 per cent on 9 May, after reaching a high of just under 4.6 per cent in early January.