Mortgage deals now available at sub 4% rates – and inflation still expected to fall quickly in the second half of this year.

Inflation remains stubbornly high suggesting the Bank of England will increase interest rates further.

The rate at which the cost of goods and services are rising – as measured by the Consumer Prices Index – fell slightly in March, dropping from 10.4% to 10.1%.

But the fall was lower than economists had been expecting, with inflation still more than five times higher than the Bank’s 2% target.

As a result, commentators are predicting the Bank’s Monetary Policy Committee (MPC) will increase the Bank Rate again when it meets in May, and possibly make further hikes later in the year, dashing hopes that interest rates had already peaked.

But despite rising interest rates, mortgage rates are continuing to fall, with best buy deals currently available with rates of less than 4%.

Why is this happening?

Inflation has remained stubbornly high, despite the MPC increasing the official cost of borrowing from 0.1% in December to 4.25% now.

The high level of inflation is being driven by a number of factors including the conflict in Ukraine, which has pushed food and energy prices higher, the resumption of normal life after Covid and issues relating to the weather.

A very hot summer in Asia and cold winter in Europe in 2022 increased the demand for electricity to power air con and heating, at a time when suppliers were hit by the invasion of Ukraine, which pushed fuel prices higher.

Adverse weather has also impacted food production, with hot weather across Europe affecting salad and soft fruit crops, while droughts in Argentina have affecting soybean harvests, further driving up food prices.

(Soybeans are used to make soybean oil, the main substitute for sunflower oil, which is in short supply due to the war in the Ukraine.)

However, economists are still expecting inflation to start falling quickly in the second half of the year.

In particular, they are predicting steep price falls in gas and electricity prices, which is good news for consumers.

Once inflation gets closer to its 2% target, the MPC can then consider cutting the Bank Rate to help support the economy.

What should I do if I need to remortgage?

While the prospect of another rise in interest rates may be alarming if you need to remortgage, you shouldn’t panic.

Mortgage rates have actually been moving in the opposite direction to interest rates for some time now, with the average cost of a five-year fixed rate mortgage falling by 0.23% since October, despite the Bank Rate increasing by 2% during the same period.

If you need to remortgage, you will have to decide whether or not to opt for a fixed rate deal or a tracker product.

Under a fixed rate mortgage, the amount of interest you pay will stay the same for the duration of your product term, typically two or five years, giving you the security that your monthly repayments will not increase.

If you take out a tracker deal, your interest rate will move up and down in line with changes to the Bank Rate.

Average tracker rates are currently 0.48% lower than the average two-year fixed rate mortgage, but this could change if the MPC increases interest rates again, as any rise would be passed on to you.

That said, if inflation does start to fall and interest rates are cut, you would benefit from the reduction if you are on a tracker mortgage.

If you opt for a fixed rate mortgage, you will need to decide whether to fix for two years or five years.

Five-year deals are currently 0.32% cheaper than two-year ones, but remember that despite high inflation, interest rates are still likely to be close to peaking, so if you fix for five-years you will be locked into these higher rates for longer.

It is also important to remember that fixed rate mortgages typically have early redemption penalties, so if you take out a five-year deal, you need to be confident you will not need to end it early.

Whatever you decide to do, it is important to shop around. The average rate charged on a two-year fixed rate mortgage is currently 5.32%, but the most competitive rates on offer start at 3.99%, with some five-year fixed rate mortgages available for 3.92%.

If you are coming to the end of your mortgage term, you should start planning now.

Lenders will let you ‘book’ a rate up to six months before you need to remortgage.

The average standard variable rate – the rate you are automatically put on if you do not remortgage – is currently 7.12%, so you want to avoid that if possible.

What does this mean for the housing market?

Although mortgage rates are significantly higher than they were a year ago, the number of people falling behind with their monthly repayments remains low by historic standards.

Lenders are expecting to see an increase in the number of people struggling with their mortgage, but this is unlikely to lead to a big jump in homeowners who are forced to sell their property.

This is partly because banks are obliged by the regulator to work with customers to find a solution and can only repossess a home as a last resort.

At the same time, employment levels remain high. In fact, recent government data showed that the unemployment rate is currently just 3.8%.

As a result, there are unlikely to be a high level of forced sales, which is good news for the property market.

Instead, higher interest rates are likely to cause activity in the housing market to be more subdued than in recent years.

The number of people looking to buy a home fell sharply in the wake of the mini-Budget, which caused a steep rise in mortgage rates.

But there are already signs that demand is recovering, with buyer numbers reaching their highest level since October in March.

Property values are just 1% lower than they were in October, and while some ‘soft repricing’ is expected to continue, with sellers making modest downward adjustments to match what buyers are prepared to pay, there are not likely to be steep house price falls.

Meanwhile, the number of homes for sale has increased, offering more choice for potential buyers following years in which the market has been plagued by a shortage of stock.

Key takeaways

  • Inflation remains stubbornly high suggesting the Bank of England will increase interest rates further
  • But mortgage rates are continuing to fall, with best buy deals currently available for below 4%
  • And economists still expect inflation to start falling quickly in the second half of the year.