BoE mortgage warning puts the brakes on cheaper rates

However, since the CEO of the Prudential Regulation Authority issued a warning that the Bank of England is watching mortgage rates ‘like a hawk’, wholesale cuts to the average two-year fixed rate have dwindled and the average rate has started to instead increase, from 2.47% in May to 2.50% July 2019.

The largest cuts to two-year fixed rates took place at the maximum 95% loan-to-value (LTV) tier, where the average rate fell by 0.70% from 3.95% in August 2018 to 3.25% in June 2019, where it has remained for the last two months.

Darren Cook, Finance Expert at Moneyfacts.co.uk, said: “It is clear the warning by the PRA in May that the Bank of England is watching mortgage rates ‘like a hawk’ seems to have fulfilled the central bank’s possible intention to slow down mortgage rate cuts. Average mortgage rates had been steadily declining for some time, especially rates at higher LTV tiers, and prudent interference may have been a necessary intervention.

With the average two-year fixed mortgage rate at maximum 60% LTV increasing from 1.89% to 1.90% since August 2018 and the average rate at maximum 95% LTV falling 0.70% from 3.95% to 3.25% over the same period, it seems clear that mortgage providers have been cutting risk margins to retain a competitive edge. However, it seems that this is possibly the end of widespread mortgage interest rate cuts due to competition for the time being, and we may only expect marginal changes until wholesale funding costs dictate differently. In fact, the only tier to see the average two-year fixed rate fall since May is the 65% LTV tier, perhaps suggesting providers are now focusing their attention at the less risky end of the sector.

Despite the cuts at the higher LTV tiers appearing to stall, potential first-time buyers are still, on average, getting a better deal than before the base rate rise. For example, if a potential buyer with a 5% deposit looking for a repayment mortgage of £200,000 over 25 years was offered the average rate of 3.95% for a two-year fixed deal in August last year, it would see them repay £1,050.16 per month. However, if the borrower were to be offered the same terms at the current average rate of 3.25%, it would cost them £974.63 per month, £75.53 per month less, equating to a saving of £1812.72 over the 24-month fixed term.”