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Lenders cut mortgage rates despite latest BoE rate rise

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UK lenders have cut the cost of mortgages, offering hope for the housing market in a week when the Bank of England hiked rates to their highest level in 15 years and house prices fell the most since 2009.

The BoE raised rates to 5.25 per cent on Thursday, its 14th consecutive increase, and Huw Pill, BoE chief economist, indicated on Friday that rates were likely to stay high for a prolonged period. 

But over the past few weeks, markets have priced in a lower peak of interest rates next year and it is these “swaps” rates that banks use to price mortgages.

NatWest, Halifax and Virgin Money have all cut rates this week — by as much as 0.41 per cent in some cases. That action followed cuts by Nationwide, Barclays, TSB and HSBC last week. Santander and Coventry Building Society also announced reductions.

David Hollingworth, director at London & Country Mortgages, said that Thursday’s news had been priced in to lenders’ calculations.

Aneisha Beveridge, head of research at Hamptons, the estate agent, said: “If everything follows the BoE expectations from here on in, I think we’ve seen mortgage rates peak about a month ago. They might come down a tiny bit more but they won’t come done too much until we see inflation falling across the board.”

Aaron Strutt, director at broker Trinity Financial, said: “We are starting to see more of the lenders reducing rates.”

In spite of the individual rate cuts, the average two-year fixed mortgage rate is still at 6.85 per cent, close to the highest level in 15 years, according to data from website Moneyfacts.

Line chart of two-year fixed rate mortgage rate (%) showing Mortgage costs are near 15-year highs

The pain of higher interest rates is having a very uneven impact in the housing market, according to research by Savills.

Nearly three-quarters of cash buyers surveyed by the estate agency said that their purchasing budget had remained the same. But nearly 60 per cent of those seeking to take out a mortgage with a loan-to-value ratio above 50 per cent said they had cut their budget. 

“Cash buyers who are not exposed to concerns around rising interest rates have been able to drive ahead strongest in the current market,” said Frances McDonald, director of research at Savills.

By contrast, Chris Storey, chief commercial officer at digital lender Atom Bank, warned that the 1.4mn households due to come off fixed rates this year faced a steep increase in costs.

“People will perhaps have to become more accustomed, in the long term, to higher interest rates than they’ve faced in the last 15 years . . . especially if they have a payment shock coming off of a fixed-rate mortgage,” he said.

“The Bank of England might have to start cutting rates late next summer,” said Beveridge. “You might see mortgage rates react a bit earlier because they’re priced off of swap rates.”

The BoE’s Pill said: “Monetary tightening . . . is working. There’s no pre-determined path for interest rates, but rather we are responding as the economy and the data evolve.”

Additional reporting by James Pickford

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