Fixed mortgage deals expected to remain stable after interest rate rise

Interest rates have gone up again -- but analysts believe that mortgage rates for fixed-term deals are close to peaking, and some lenders have already started to reduce their rates.

On Thursday, the Bank of England raised interest rates for the 14th consecutive time, increasing the base rate from 5% to 5.25% -- the highest level seen since April 2008.

Rates have been hiked month on month since December 2021 in an effort to help bring down high inflation. This has increased the cost of home loans, with the average rate on a two-year fixed mortgage deal recently surpassing the peak seen after last autumn's 'mini-Budget'.

However, better-than-expected inflation data for June has led to a fall in the underlying cost of finance for fixed-rate mortgages.

Rightmove mortgage expert Matt Smith, quoted by news agency PA Media, said that the drop in consumer price inflation from 8.7% in May to 7.9% in June gave the market "renewed confidence that inflation will continue to fall, and the base rate won't have to go as high as previously feared, meaning lenders can tentatively start to reduce rates".

Capital Economics has predicted that interest rates will rise once more in September, peaking at 5.5%, and will then stay at that level for a year.

Lenders reduce fixed mortgage rates

For outstanding variable rate mortgages, the latest 0.25 percentage point rise in interest rates will add around £23.71 to monthly tracker payments, according to figures from UK Finance. That adds up to nearly £285 per year.

Homeowners on a standard variable rate mortgage will see their payments increase by around £15.14 per month or nearly £182 per year.

In contrast, several of the biggest lenders cut rates on their fixed mortgage deals ahead of the latest interest rate rise as the outlook for inflation improved.

Nationwide, Barclays, TSB and HSBC were the first to reduce their rates, followed by NatWest, Halifax, Virgin Money and a number of smaller lenders.

'Payment shock'

"Lenders have already priced this increase into their fixed rates so we don't expect pricing to rise," Mark Harris, chief executive of mortgage broker SPF Private Clients, told PA Media after Thursday's interest rate decision. "Indeed, a number of lenders have reduced fixed rates in the past few days on the back of calmer swaps, which underpin the pricing of fixed-rate mortgages."

Harris added, however, that the days of "rock-bottom pricing" are over.

"Borrowers due to come off cheap fixes face a real payment shock, so it is important to plan ahead as much as possible and act now."