Why did The Mortgage Works cut rates below 5%?

The Mortgage Works (TMW) was the first lender to reduce its fixed rates below 5% recently – with many major lenders quickly following suit.

So, how was the lender able to do this, what has changed now compared to a month ago, and is the feeling more certain that the Bank of England will not raise rates further?

Mortgage Introducer spoke to The Mortgage Works to find out.

How can you offer sub-5% rates?

Dan Clinton (pictured), head of specialist lending at The Mortgage Works, said although the Bank of England base rate currently sits at 5.25%, for lenders, swap rates are the biggest driver when offering customers a fixed rate mortgage.

“So, while it was sharp increases in swap rates which drove up mortgage rates in July, subsequent falls have enabled us to bring these rates back down again,” he said.

Clinton said lenders use these rates to hedge against future interest rate risks. Unlike tracker mortgages which are directly indexed to the base rate, he added that swap rates are mostly driven by the market’s future expectation for the base rate over a period of time.

“So for example, where the market expects the base rate to be higher in the short term before steadily reducing, this is making five year fixed rates lower than two year fixed rates,” Clinton said.

What has changed in recent times?

There are a number of considerations which inform the market’s view of the future of the base rate, but Clinton said it is inflation which is the most significant factor in the current environment.

“Recently, the Consumer Price Index came out lower than market expectations, signalling that measures taken to control inflation are working and further base rate increases to bring inflation down to the government’s 2% target may no longer be needed,” Clinton said.

Consumer price inflation fell from 6.8% to 6.7% between July and August, which shocked many experts as a slight increase was anticipated.

This was then reaffirmed, he added, on September 21, with the Monetary Policy Committee (MPC) voting to hold the base rate at 5.25%.

The hold to the base rate ended the streak of 14 consecutive interest rate hikes, and was voted in favour by a majority five to four vote.

Will the Bank of England raise the base rate again?

Looking ahead, he said the latest market expectation is that the base rate is very near its peak, if not there already.

“So, short of any surprises in upcoming economic data, we have greater comfort that the cycle of mortgage rate increases is mostly behind us, bringing a more stable picture of mortgage rates going forward,” Clinton said.  

However, while many experts are anticipating the base rate to either hold or fall over the next Monetary Policy Committee meetings, Andrew Bailey, governor of the Bank of England has not shut the door on further increases.

The governor said that it is still too early to consider cutting UK interest rates after the central bank held its base rate steady for the first time in almost two years.

What are you expecting from the Bank of England regarding the base rate moving forward? Let us know in the comment section below.