The Bank of England have held interest rates at 4.75% after a uptick in inflation in November, which will have disappointed many variable rate mortgage holders.
This week, the Office for National Statistics revealed that consumer prices had risen by 2.6% annually in November, and this was followed by the Monetary Policy Commission (MPC) voting to hold the main interest rate at 4.75%, where it has sat since being reduced from 5% last month.
A few weeks ago, many had been hopeful that the rate would be lowered once more before the end of the year, but this became less of a likelihood as the decision date moved closer – and the MPC’s more cautious decision was widely expected by analysts when it came yesterday.
On a positive note, Rob Wood, the chief UK economist at the consultancy Pantheon Macroeconomics, said that a “February rate cut still looks more likely than not to us”. However, for some in the property market, there may now be decisions to be made.
Variable interest rates won’t fall
Mortgage holders who have opted for variable rates tend to do so in the hope that rates are set to fall, and therefore don’t want to lock into a fixed rate. Some borrowers choose a variable rate for more flexibility, as they allow higher overpayments than a fixed rate mortgage, which may be beneficial for those in a position to pay off their loan more quickly.
However, for those on tracker mortgages or standard variable rates – which tends to be the lender’s ‘default’ rate, and the most expensive – the latest interest rate announcement means they are not yet set to benefit from cheaper payments as their rate will remain unchanged.
To put it into perspective, the latest figures from Moneyfactscompare show that the average standard variable rate is currently 7.85%, which is down on last month’s 7.95%, and further from December 2023’s level of 8.19%.
However, the average two-year fixed rate, which is currently the most popular option, is currently 5.52%, having fallen from a high of 6.04% last December, although it is up slightly from last month’s average of 5.39%.
According to Rachel Springall, finance expert at Moneyfactscompare.co.uk, borrowers are likely to feel “frustrated” that mortgages have not become significantly cheaper over the course of 2024, with the hope that the situation will change next year with more interest rate reductions.
“Cuts to the base rate may also delight borrowers who are stuck on a variable rate deal or are soon to come off their low-rate fixed deal, indeed there are estimated to be millions of borrowers due to refinance in 2025,” she said.
“The incentive to switch away from a Standard Variable Rate (SVR) remains prevalent as a typical mortgage being charged the current average SVR of 7.85% would be paying £366 more per month, compared to a typical two-year fixed rate.”
What could the future hold?
While there will always be much speculation around what will happen with inflation, the economy and interest rates, uncertainty abounds as there are multiple factors at play that will influence each of these things.
Opting for a fixed rate mortgage can offer peace of mind that you will have a stable product for the term chosen, unaffected by what happens in the market – but there will still be some who prefer to hedge their bets and hold out for cheaper options.
Rachel Springall added: “Those looking to fix for longer will find the average five-year fixed rate has not fallen as much as its two-year counterpart in 2024, but borrowers may well choose them for peace of mind.
“Mortgage rates have been volatile this year, particularly surrounding the Budget when swap rates rose and caused lenders to re-think their future rate pricing. This spells uncertainty for borrowers as there really is no way of predicting where rates will go.
“Those concerned should seek advice to get a grasp on the latest deals available to them. First-time buyers in particular need support to help their deposits stretch a bit further as affordable housing is in short supply.”
It is important to note that, historically, interest rates in the UK have been at much higher levels, and the ultra-low rates of more recent years had been unprecedented.
According to Trading Economics, the average interest rate in the UK was 7.07% between 1971 and 2024. This spanned from an all-time high of 17% in November 1979, down to a record low of 0.1% in March 2020.
Read more UK property market news and updates here.
