Brits Prepare for Higher Mortgage Payments Despite Rate Cuts

Despite the Bank of England expected to reduce interest rates, UK homeowners are bracing for higher mortgage payments. The anticipated cuts may not alleviate the financial pressure for many, as mortgage rates could remain elevated. This situation reflects broader economic challenges, leaving homeowners to navigate the rising costs of borrowing, even with efforts to lower rates.

Britons are anticipating prolonged higher mortgage payments, even as the Bank of England prepares to lower rates on Thursday.

Last week, Finance Minister Rachel Reeves’ tax-and-spend budget caused market fluctuations, leading analysts to predict an uptick in short-term growth and inflation.

David Hollingworth, associate director at L&C Mortgages, commented, “It’s a confusing time for mortgage borrowers, as the expectation is for a base rate cut, yet fixed rates seem poised to rise.”

Britons are facing prolonged higher mortgage rates after the government's tax-and-spend budget disrupted expectations for near-term interest rate cuts.

Although the Bank of England is widely expected to lower rates on Thursday, marking the second cut this year, predictions of a more dovish approach appear uncertain following Finance Minister Rachel Reeves’ announcement of £40 billion ($51.41 billion) in tax hikes and a revision to the U.K.’s debt rule.

U.K. borrowing costs surged on Thursday as investors assessed the impact of Reeves’ borrowing plans and the secondary effects of tax hikes on inflation and growth. Gilt yields, which move inversely to prices, have remained elevated, with the 10-year yield reaching 4.508% on Wednesday.

Mortgage rates have also risen amid this uncertainty, with several smaller and mainstream lenders increasing their rates, anticipating that interest rates may remain higher for a longer period. This comes despite a gradual decline in home borrowing costs following the Bank of England’s initial rate cut in August, its first in over four years.

David Hollingworth, associate director at L&C Mortgages, commented, "It’s a confusing time for mortgage borrowers when expectations are for a base rate cut, but fixed rates appear set to rise."

Virgin Money became the first major lender to raise mortgage rates following the budget, increasing them by 0.15%. However, some banks, such as Santander, took a different approach by reducing rates by 0.36%. As of Thursday, the average five-year fixed mortgage rate stands at 4.64%, down from 5.36% last year, while the average two-year fixed rate is now 4.91%, down from 5.81% in 2023, according to Rightmove data.

David Hollingworth commented, "This isn't the sharp rate spike seen in recent years, but if funding costs don’t decrease, rates below 4% for five-year fixes may be at risk," adding that other lenders may also reconsider their rates.

Reeves’ fiscal reset comes at a pivotal moment for the Bank of England (BOE), which has previously taken a more hawkish approach to easing compared to other major central banks. Economists had raised expectations for quicker rate cuts following a sharp drop in inflation and slowing wage growth last month, but the budget has raised doubts, with the Office for Budget Responsibility forecasting higher near-term economic growth and inflation.

J.P. Morgan’s U.K. economist, Allan Monks, noted that the BOE is likely to maintain its “gradual approach” to rate cuts, with interest rates remaining 50 basis points higher than initially expected by the end of the cycle. Markets are currently pricing in a 97% chance of a 25-basis point cut on Nov. 7, bringing the key rate to 4.75%.

Analysts generally agree that a rate cut on Thursday is likely, but expect the BOE to adopt a more cautious approach afterward. Goldman Sachs predicted that the BOE would hold rates steady in December, cutting sequentially from February to reach 3% by November 2025. Citi echoed this, citing increased government fiscal activity as a reason for caution but predicting more aggressive cuts after Reeves' plans are fully implemented.

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Source: CNBC‍