Can Labor really cut mortgage rates?

Higher mortgage rates have plagued homeowners for the better part of two years.

Average five-year fixed-rate mortgages remain above 5 per cent, while two-year fixed-rate mortgages are close to 6 per cent, according to Moneyfacts – a far cry from the 2.5 per cent average seen at the start of 2022.

The Labor campaign promised change for the country – and a fall in mortgage rates would surely be a positive change for many.

The higher mortgage rates are partly due to the Conservative government’s 2022 mini-budget, when unfunded tax policies have panicked the market and sent average rates soaring to nearly 7 percent.

Now Labor says it will ensure economic stability with strict spending rules to keep mortgage rates as low as possible.

Can the government influence interest rates?

While Labor promises to keep mortgage rates low, economists point out that the party may actually have little influence on the matter.

This is because interest rates, which in turn affect mortgage rates, are set by the Bank of England, which is independent of the government.

Andrew Wishart, chief economist at Capital Economics, said: “The government has little control over mortgage rates and given the limited difference in the party’s fiscal plans, there is no reason to change the base rate outlook in the election.

“This means that a Labor administration, by signaling that it will be cautious, should avoid raising interest rates in the way that Liz Truss’s ‘growth plan’ did.”

Interest rates are falling anyway

But while Labor has little or no control over the direction of interest rates, they may have come to power just in time for interest rates to start falling.

Some mortgage lenders are already cutting rates, with Barclays, HSBC and others doing so this week.

The Bank of England is expected to start cutting interest rates this year once inflation is under control.

CPI inflation fell back to the Bank of England’s two percent target in May.

This means inflation has now fallen to its lowest level since July 2021, down dramatically from the 11.1% peak reached in October 2022.

While the Bank of England continues to hold the key interest rate at 5.25 percent from August 2023, markets are confident that the first cut will come at the end of the summer.

David Hollingworth, deputy director of L&C Mortgages, says: “The rate of inflation has returned to the Bank of England’s target and if it starts to look more sustainable over the long term, the new government could soon see a cut in the base rate. .’

However, the first cut in the prime rate may not lead to a dramatic reduction in fixed mortgage rates.

That’s because lenders set their rates based on broader market expectations about where interest rates are headed – and money markets have already “priced in” a key rate cut over the summer.

Where will mortgage rates go next?

Mortgage rates have started to fall this year, with markets dramatically raising expectations of a cut in prime rates.

This then quickly reversed itself and there was a sharp rise in mortgage rates in the early spring.

Markets are now predicting that the key interest rate will fall to around 3.5 percent over the next two years.

Hollingworth says: “Even if the prime rate comes down in August, it may not result in a big move in fixed mortgage rates.

“If the markets feel that rates can be cut harder and faster, then that could have an effect.

“Fixed rates will always fluctuate based on sentiment, and we’ve seen rates rise in recent months before recent cuts have released some of those increases.”

Currently, the lowest two-year corrections are hovering just above 4.6 percent, while the lowest five-year corrections are hovering just above the 4.2 percent mark.

At the start of the year, when markets expected six key rate cuts in 2024 alone, the lowest two-year fixed rates hovered around 4.2 percent and the lowest five-year fixed rates were below 4 percent.

Richard Donnell, head of research at Zoopla, thinks rock bottom mortgage rates are unlikely to change drastically anytime soon and doesn’t expect rates to break the lows seen earlier this year.

“Mortgage rates today are already assuming some reduction in prime rates,” says Donnell.

The prime rate is expected to fall to either 3.25 percent or 3.5 percent over the next 12-24 months, but mortgage rates look set to remain in the 3.75 to 4.5 percent range.

“This is low by historical standards, but not in the recent past when quantitative easing kept borrowing costs very low.”