UK Mortgage Rates Climb Despite Bank of England's Interest Rate Cut

Highlights: 

• Mortgage Rate Increase: UK average mortgage rates rose daily this week, reaching 5.50% for five-year fixed deals despite a recent rate cut by the Bank of England. 
• Savings Rates Decline: Average savings rates fell to 2.98%, adding pressure on consumers seeking returns on deposits. 
• Shift in Market Expectations: Rising swap rates and a ‘higher for longer’ outlook on interest rates have fueled uncertainty, impacting lender pricing strategies. 

The UK mortgage market saw an unexpected rise in rates this week, defying expectations following the Bank of England’s recent interest rate cut. According to data from Moneyfacts, the average interest rate on a typical five-year fixed mortgage increased steadily, ending the week at 5.50%, up from 5.42% a week earlier. 

Rate Increases Defy Expectations 

The rate hikes have come as a surprise, given that the Bank of England implemented its second 25 basis point cut earlier this month in an attempt to ease financial conditions. Despite the central bank’s actions, lenders have been forced to increase mortgage rates in response to rising swap rates, which influence the cost of fixed-rate loans. 

The sudden pullback of sub-4% two-year fixed mortgage deals by major lenders on Thursday highlighted the swift change in market sentiment. These moves reflect growing concerns among financial institutions that the recent cuts by the Bank of England may not be enough to bring inflation under control, especially given ongoing fiscal pressures and global economic uncertainties. 

Savings Rates Take a Hit 

While mortgage rates have climbed, savings rates have moved in the opposite direction. Average savings rates fell to 2.98% by Friday, down from 3.01% a week earlier. This trend is unwelcome news for savers who were hoping to benefit from higher returns following a year of elevated interest rates. The dip in savings rates signals that banks are adjusting their pricing strategies, likely in anticipation of slower rate cuts moving forward. 

Market Outlook: Higher for Longer? 

Financial markets have shifted their expectations, now anticipating a slower pace of interest rate reductions by the Bank of England. L&C Mortgages broker David Hollingworth noted that the prevailing sentiment in the market has moved towards a ‘higher for longer’ outlook. 

“The base rate is still projected to fall over time,” Hollingworth said, “but the market is increasingly questioning whether the pace of these cuts will be as rapid as initially expected.” 

Swap rates, which are a key indicator used by lenders to set fixed-rate mortgages, have surged in recent weeks. Five-year SONIA swap rates climbed to 4.05% this week, up from 3.80% a month ago. Two-year swaps increased even more sharply, rising to 4.26% from 4.00% over the same period. The uptick in swap rates reflects broader market fears that inflation may persist longer than previously anticipated, particularly in light of new fiscal policies announced by the UK government and global economic factors, including uncertainty surrounding US policy under President Donald Trump. 

Impact on Borrowers and Lenders 

For mortgage borrowers, the rate increases are a significant setback, particularly for those nearing the end of their fixed-rate deals and looking to remortgage. The latest data suggests that lenders are taking a cautious approach, adjusting their offers in response to rising wholesale borrowing costs. 

For lenders, the environment remains challenging. With swap rates rising and market expectations shifting, banks are facing increased costs to secure funding, which they are passing on to consumers in the form of higher mortgage rates. This dynamic highlights the complex interplay between central bank policy and market forces, particularly in a volatile economic climate. 

Economic Headwinds Ahead 

The broader economic outlook remains uncertain. While the Bank of England’s recent rate cuts were intended to provide relief, the market response suggests that the impact may be limited. Persistent inflation, combined with rising fiscal spending and global economic pressures, could keep interest rates elevated for longer than anticipated. 

As the year comes to a close, borrowers and savers alike may face continued uncertainty. The outlook for mortgage rates and savings returns will largely depend on how quickly inflation eases and whether the Bank of England’s strategy proves effective in stabilizing the economy. 

Conclusion 

The unexpected rise in mortgage rates despite recent rate cuts underscores the challenges facing the UK economy. While the Bank of England has moved to reduce borrowing costs, market dynamics are driving rates higher, leaving consumers caught in the middle. The evolving situation serves as a reminder of the complexities in predicting market behavior, especially during periods of heightened economic uncertainty. As financial conditions tighten, both borrowers and lenders will need to navigate a shifting landscape, with many looking ahead to the Bank of England’s next moves for further guidance.