The Bank of England has held interest rates for a fourth time, but despite that mortgage rates are dropping, giving some hope for homeowners who are refinancing. The base rate was kept at its 15-year high of 5.25% at the Monetary Policy Committee’s first meeting of 2024. However, the year has started with a significant drop in mortgage rates, despite there being no shift in base rate. We’ll look at the outlook for rates, what the fall means for those who are coming to remortgage this year and what action homeowners can take.

WHAT’S THE OUTLOOK FOR INTEREST RATES?

Market expectations are that base rate will be held at current levels until May or June this year, when the Bank will make its first cut to rates. It is then expected that it will keep cutting for the remainder of the year, with rates ending up at around 4.25% by December this year – a significant drop from where we are now.

However, this is just what the market expects and the Bank of England has continually said it’s potentially too soon to be talking about rate cuts. We have also learn't from recent experience that a few bits of economic data can make a big difference to rate expectations. If inflation proves stubborn, for example, the path to rate cuts could change.

WHY HAVE MORTGAGE RATES DROPPED WHEN BASE RATE HASN’T?

Mortgages are priced based on market expectations of interest rates but also on competition. At the start of 2024 we saw a number of big lenders come out and cut their rates, which prompted others into rate cutting action. This will partly be based on the expectation that rates are going to fall, with mortgages being priced based on interest rates across the two or five years of the fix, not just what rates are today. It will also partly be based on a lacklustre housing market meaning that not as many people have been taking out mortgages – so banks and building societies need to price more attractively to sell more.

WHAT ARE RATES NOW?

The latest Bank of England data shows a drop in the interest rate paid on new mortgages by six basis points in December – which was the first fall in average mortgage rates for three years. Based on Moneyfacts data since the start of August 2023, the average two-year fixed rate mortgage has fallen from 6.85% to 5.56% and the average five-year fixed rate has fallen from 6.37% to 5.18%. But what’s perhaps more dramatic is the drop we’ve seen this year, with the average two-year deal falling from 5.93% to 5.56%, and the five-year deal falling from 5.55% to 5.18%. Also bear in mind that these are average figures, so those with good credit ratings and a healthy loan-to-value ratio will be able to lock in much lower rates.

However, there are some words of caution that these rates may not last. Rachel Springall, finance expert at Moneyfactscompare.co.uk, says: ‘Lenders can pull deals if they have an influx of applications, and a volatile swap rate market can put pressure on pricing where margins are already tight. It would be inevitable to see a mix of both fixed rate rises and cuts when lenders endeavour to manage consumer demand, any targets and future rate expectations.’

MY FIX IS UP THIS YEAR, WHAT SHOULD I DO?

Around 1.5 million homeowners have a fixed rate mortgage deal coming to an end this year, according to the FCA (Financial Conduct Authority), which means they need to face the realities of higher mortgage rates for the first time. The best thing to do is be prepared. Make a note of when your fixed rate deal is up and put a note in your diary for six months ahead. At this point you can lock in a new mortgage deal – if rates fall in the six months between then and when your fixed rate deal expires you can move to the lower rate – but by getting a deal in place six months ahead you have a fallback plan. You can use a broker to help navigate this (there are fee-free brokers out there) or do it with your current lender.

The worst thing you can do is let your fixed rate deal elapse and fall onto the lender’s standard variable rate or reversion rate. It’s the default rate that you go onto when your fixed-rate deal expires and you haven’t lined up a new one, but it is the most expensive rate a mortgage lender will charge and currently some are charging 8% or even 9%. Even a few months on this rate could be financially crippling for some – so avoid it at all costs.

While mortgage rates have dropped, they are still almost guaranteed to be higher than your current deal. So, it’s good to work out ahead of time whether your new repayments will be affordable or not. If you need to reduce your monthly repayments you could extend the term of your mortgage – although this will cost you more in the long-run – or you could switch to an interest-only deal for a while (but this should be a short-term move rather than a long-term plan).

If you think you’re going to struggle to make your payments ahead of your fixed rate deal ending (or if you’re on a variable rate deal) contact your lender as soon as possible to work out your options. You can also get help from organisations like Citizens Advice.

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