Inflation figures ‘excellent news’ for mortgages -‘light at end of tunnel’

The UK inflation rate rose by 7.9 percent in the 12 months to June 2023, down from 8.7 percent in May, which could spell good news for mortgage holders.

The Bank of England has increased the Base Rate 13 times consecutively since the start of last year to stem surging prices, which has, in turn, sent borrowing costs soaring.

The average two-year fixed rate mortgage deal hit a staggering 6.7 percent on Monday according to experts at comparison site Uswitch, while average Standard Variable Rates (SVR) remain at an eye-watering 8.45 percent.

However, experts are saying there is now less pressure for the Bank of England to increase the Base Rate much higher, given inflation’s slower pace.

Core inflation, which strips out the more volatile items such as food and energy, remained high at 6.9 percent but is marginally lower than May’s 7.1 percent, which indicates that the cycle of Base Rate rises could finally be having the intended effect.

READ MORE: Inflation still ‘far too high’ despite dropping lower than expected to 7.9%

Lewis Shaw, founder of Mansfield-based Shaw Financial Services said: “This inflation data is excellent news for everyone, mortgage holder or not. There’s still a long way to go, but to see headline CPI fall and, crucially, core inflation reduce albeit by a smaller margin, is something we’ve all been hoping for and may suggest we’ve now turned the corner.”

Mr Shaw said this could see the Bank of England raise the Base Rate by 0.25 percent in August, as opposed to the 0.5 percent rise seen in July.

Mr Shaw continued: “For mortgage holders, this is great news. I’m going out on a limb here to say fixed mortgage rates have peaked. We may see a little shuffling around but the continued painful increases are over.

“That doesn’t mean that we’re out of the woods, however, it does mean we can now start to see the faint glimmer of light at the end of the tunnel.”

Gary Boakes, director of Salisbury-based mortgage broker, Verve Financial added: “This could be the most significant set of inflation data in years. For inflation to have fallen further than expectation surely means the pressure is off the Bank of England, but the ball is now in their court.

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“Hopefully, we will see a positive impact across markets and reductions in swap rates, which in turn could see a drop in mortgage rates.”

Mortgage market swap rates are the price lenders have to pay financial institutions when securing fixed rate funds and have to be large enough to mitigate any risk associated with offering fixed rate mortgages.

According to specialist property lending experts at Octane Capital, these are generally based on Gilt yields which reflect what the market anticipates will happen about interest rates further down the line.

According to Octane Capital’s research, swap rates increased at an average monthly rate of 18 percent per month in 2022. So far in July, this average monthly rate of growth has slowed to just nine percent per month.

But while this could be painting a largely positive picture for future mortgage rates, a mortgage advisor at Corsham-based Maggs Financial Services pointed out that the days of “super-low” interest rates could be a thing of the past.

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Russell Maggs said: “The days of super-low interest rates are behind us and we need to get used to living in a world of higher monthly mortgage payments. We’re also likely to see increased options in the market to fix monthly payments for the term of the mortgage as you see in the US.”

CPI is still far from Prime Minister Rishi Sunak’s target to halve inflation to 5.3 percent by the end of the year. Responding to the news, Chancellor Jeremy Hunt said: “We aren’t complacent and know that high prices are still a huge worry for families and businesses.”

When asked if the decline in inflation means the Bank should ease up on interest rate hikes, Mr Hunt said: “What we have seen is the Bank has taken very difficult decisions and the Government has taken very difficult decisions in the autumn statement to make sure that we really do start to bring down inflation. We are seeing the first fruits of that but there’s a long way to go and we need to remember that families are still feeling a lot of pressure.”

Economist James Smith at ING said it will be a “close call” whether the Bank votes for a quarter or half percentage point rise in August, with record wage growth being paid closer attention to.

He said: “Is this enough to convince the Bank of England to opt for a 25 basis point rate hike in August? We think it probably will – but it’s going to be a close call. The Bank will also be looking at the recent wage data, which was stronger than expected but came alongside figures showing a renewed cooling in the jobs market and improvements in worker supply.”

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