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Navigating UK Mortgage Rates Amidst Economic Challenges 2023

UK house prices have fallen sharply in August 2023, marking the steepest annual decline in 14 years. High mortgage rates, coupled with soaring house prices, have been a significant factor putting pressure on prospective buyers. In this article, we’ll examine the current state of mortgage rates in the UK and what this means for your finances.

Halifax’s Latest Data

According to the most recent data from Halifax, house prices have dropped by 4.6% over the year leading up to August. This decline is the most significant annual drop since 2009. Expensive mortgage rates and the high cost of homes have dampened buyer demand, with sales still lagging far behind last year’s figures.

Rising Mortgage Rates

Mortgage rates in the UK have seen a considerable increase since the central bank began raising the base interest rate in December 2021. Back then, the average two-year fixed-rate mortgage was at 2.34%. Although rates have been gradually decreasing in recent weeks, the same product now carries an average rate of 6.70%.

Recent Rate Cuts

Despite forecasts indicating that the base rate could reach 5.75% early next year, up from the current 5.25%, several lenders have recently reduced some of their two and five-year fixed rates by approximately 0.5 to 0.75 percentage points.

Factors Influencing Rate Cuts

The surprising rate cuts by some lenders in August may seem unexpected given the central bank’s 14 consecutive rate hikes. However, a drop in inflation rates in the UK has boosted banks’ and building societies’ confidence in offering loans at lower rates. Banks often adjust their mortgage prices based on movements in government bond yields (gilt yields) and swap rates. These rates have been falling, suggesting that investors believe the Bank of England’s rate hikes may be nearing their end.

Housing Market Conditions

Banks are also mindful of the slowdown in the housing market, an increasing number of borrowers struggling with repayments, and the deterrent effect of very high interest rates on potential buyers. Despite falling house prices, the average home is still £40,000 above pre-pandemic levels. To attract customers, lenders are compelled to reduce rates.

Current Mortgage Rates

As of September 8th, 2023, according to Moneyfacts, the average mortgage rates are as follows:

  • Two-year fixed deal: 6.66%
  • Five-year fixed deal: 6.15%
  • Standard variable rate (SVR): 8.09%

This marks a substantial increase in mortgage rates compared to pre-hike levels.

Choosing a Fixed-Rate Deal

If you’re nearing the end of your fixed-term mortgage deal, you may be contemplating whether to lock in a new fixed rate or switch to your lender’s often more expensive Standard Variable Rate (SVR) with the expectation of rate reductions in the near future. Deciding on the duration of your fixed-rate mortgage is essential. While longer-term fixed rates may seem appealing, current interest rates on five and ten-year deals are relatively high. Given forecasts of further rate hikes by the Bank of England, it’s essential to carefully consider your options and possibly seek independent financial advice.

Finding the Best Mortgage Deal

The cheapest mortgage deals often target existing homeowners with substantial equity or a sizable deposit, typically around 40% of the property’s value. A good credit score is also crucial to secure favorable rates. First-time buyers, with smaller deposits of 5% to 10%, may have limited options and face higher interest rates due to perceived higher risk by lenders. Mortgage fees can also impact the overall cost, so it’s essential to consider these factors when choosing a mortgage deal.

Exploring 100% Mortgages

Some lenders, like Skipton Building Society, have introduced 100% mortgage products. Initially designed for first-time buyers, this offering has been expanded to include tenants who were previous homeowners. These mortgages allow borrowers to finance between 95% to 100% of a property’s value, eliminating the need for a deposit.

The Role of Mortgage Brokers

Mortgage brokers can be valuable resources in finding the most suitable deals across the market. However, it’s worth noting that some banks may reserve special offers for their existing customers, which might not be accessible through brokers. Additionally, building up equity in your home can potentially lead to better mortgage rates.

In this ever-changing mortgage landscape, staying informed and seeking professional advice can help you make the best choices for your financial well-being.

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Founded in 2017, Fintuity has fast become one of the only digital Independent Financial Advisers (IFA) in the United Kingdom.  Fintuity offers a wide range of financial advisory services including pensions, protection, investments and mortgage advice. The key difference is that as an exclusively digital service, we can offer significant savings and a service that is direct to you and on demand.

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