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It would be very un-British of me to not comment on the weather, but there has been quite a parallel to the mortgage market and the odd weather we saw in January. We saw temperatures swing from -5C to 10C within a few days, pouring with rain one day, sunny the next. This theme of volatility also flows into the mortgage market with quite large swings in money markets, driven by both international and domestic factors, which is leading to a real quandary for the Bank of England in their rate setting meeting next week. So, we look to make sense of it all and how it will play out in the pricing of mortgages:
Market Update
Market Volatility
If you are in tune with financial markets, you will have seen quite large movements in pretty much all sectors in January. As ever, the reasons for this are very complex but the simple take away is that in general, ‘the market’ believes that inflation looks to be stickier than we had hoped last year. That led to an increase in borrowing costs for Governments, Companies, and Individuals. The reason being is that if inflation does not come down as quickly as expected last year, that means central banks across the world are likely to either not cut rates as quickly as we thought, or not at all. So, this ‘higher’ rate expectations means the cost for new borrowing is priced upwards to align with the new expectation. There are many reasons for this, but the main one currently has been the ‘Trump’ effect of having to price in volatility due to Mr Trump’s famous fickleness. Specifically in this case the talk of Tariff’s being used a punish trade partners that do not play ball with the US agenda has stoked fears that if that comes in, it is inflationary. As if the US imposes Tariff’s on China, they are likely to impose Tariff’s back on the US, which increases everyone’s costs, which increases inflation (literally having the opposite effect that Mr Trump speaks of in bringing costs down…). If inflation goes up, central banks do not cut interest rates. It really is that simple.
Domestically, we have felt this volatility more acutely as investors do not seem to believe the Governments growth agenda. Which led to the highest borrowing costs we have seen since 2008 on Govt debt. That sounds very dramatic but that is also the last time the UK Base Rate was circa 5% so more a coincidence than conflation to the financial crisis we saw at that time (as we all love a clickbait headline these days…). In recent days that has settled down, as inflation in the UK did tick down last month to 2.5% in December, from 2.6% in November and GDP started to rise again by 0.1% in November. While these are modest very modest moves, they are none the less on a positive trajectory – Inflation down, GDP up, would normally open the door to rate cuts from the Bank of England. But with the moves being so small, and the backdrop so volatile, what are they do to in their next meeting on Thursday 6th February?!
Bank of England Meeting
The Bank of England have a real puzzle to solve on Thursday, which I do not envy. On the one hand you have businesses and households screaming out for a rate cut. In fact, we saw Santander come out and say that they expected 4 rate cuts this year, when the market has only priced in 2 (with each cut typically coming at 0.25%). However, inflation is above the target level (2%) which would not normally mean the BoE would cut rates as they are famously conservative. In the last meeting, the rate setting committee voted 6 to 3 to hold rates at 4.75% (with the 3 voting for a cut) so there is a certainly support for further cuts, but will that view push to a majority vote? I certainly hope so. With the backdrop of the above and the UK Economy limping along, an early cut would be a very positive and welcome sign. Money markets have tipped a cut but with a low confidence rating. Oddly, it may not impact mortgage pricing too much as 2 cuts this year are already priced in, but it could open the door to view that rates may come down a bit quicker that currently thought, which would push down the cost of Fixed Rate mortgages. I think the theme of this year will still be volatility with pricing going up and down throughout the year, but if we do get a cut, we could get cheaper pricing which should be jumped on.
Money Market & Mortgage Rates
Money Market Rates as of 25/01/25
- 5 Year money down to 4.149%
- 2 Year money up to 4.013%
- UK Base Rate held at 4.75%
Source: chathamfinancial.com & Bank of EnglandSummary
Now more than ever, quality financial advice is needed. Not just to navigate the product options discussed above, but also the very tricky ‘affordability’ rules that lenders are imposing. This is how lenders determine how much they will lend you, which sways hugely on your income, outgoings, debts, commitments and spending patterns. Not all lenders look at things the same way, so that is why it is imperative you talk to an adviser who can find the best way forward for you.
Rose Capital Partners > Heron Financial
Rose Capital has partnered with Heron Financial Group. All ‘new business’ will go through Heron and we’ll intro you into the team there as needed. You can contact Heron directly here if you prefer. Over the coming weeks and months you will be updated personally on any changes that affect you