With lenders offering interest rates lower than the Bank of England’s standard base interest rate, homeowners and home buyers are taking notice and advantage of the opportunity to save money. They certainly should, because the lower rates are due to lenders being in a competitive environment versus basing their rate choices on the decisions of the Bank’s Monetary Policy Committee (MPC). Through most of 2023, the MPC was increasing the base rate. Votes to hold it steady did not occur until the final three MPC meetings of the year. There certainly was not a vote to cut rates, so lenders took the initiative to do so without direction of the MPC.

The current base rate is 5.25%. Having quickly increased to a fifteen year high, the rate had been historically low at almost zero at 0.1% in December 2021 then raised that month at the MPC final meeting of 2021 to more than double at 0.25%. A year later, in December 2022, the rate had grown to 3.5% and the rate was held steady at 5.25% in December 2023.

The higher rates led to a drop in demand for lending. Home buyers were no longer shopping for mortgages at the same level of the previous years or even months, and some were not just simply stepping back. Many hopeful home buyers were shut out due to affordability issues. 

The reason for the higher rates was inflation and it began to drop more steeply than expected during the last quarter of the year. Increased confidence in the economy and in lending led a few lenders hoping for growth in demand to lower their rates despite the MPC holding the base rate steady.

Other lenders soon followed, and a competitive environment developed, and it was welcomed by those seeking a mortgage or remortgage. The number of lenders cutting rates grew, the number of rates below the Bank’s base rate grew, and more products were brought onto the market. 

The number of homeowners shopping for a remortgage to avoid being transitioned to their lender’s standard variable rate (SVR) at the end of their mortgage term grew. Some homeowners might have abandoned their current mortgage deal and ended it early to remortgage at current rates. 

According to the Monthly Remortgage Snapshot research report offered by LMS, the number of remortgage completions grew by 43% in December. It is likely January data will reveal a continued increase in demand. The overall cancellation rate for remortgages declined by 7.61%.

Other data concerning remortgaging included 40% of loans included an increase in their size of debt of an average of £18,121, with the average decrease of debt amounting to £15,127. The majority of remortgages, 78%, increased repayments by an average of £392. Though this amount is hundreds of pounds, those not remortgaging likely faced even higher repayments being moved to their lender’s SVR. 

Also, homeowners coming to the end of their two-year fixed rate mortgages would be facing a substantially higher interest rate and higher repayments. In January 2022, the base rate was only 0.25% and increased to 0.50% in February 2022. Moving from a lender rate when the Bank’s rate was under 1.0% to rates offered in December with a Bank rate at a 15 year high of 5.25% amounts to a greater expense depending on the outstanding debt on the loan.

In December, though there were lenders cutting their rates, there were not as many as there are currently, nor were there the number of under base rate deals found today. 

The next MPC meeting is the first Thursday in February. There is not likely to be a major shift in the MPC’s stance, and the current rate should hold steady. No cut in the rate is expected as inflation ticked upward in the last report from 3.9% to 4.0%. 

As a warning to homeowners and home buyers, they should not expect lenders to continue their competitive mode. It was in response to a lack of demand for borrowing. As demand continues to rise, lenders could pull their best deals and do so quickly. The opportunities therefore that are available now could disappear tomorrow. It would be a smart strategy to consider shopping for a remortgage to discover what deals are available rather than miss out by waiting for even more favorable deals.