Estate agents are braced for a busy Autumn selling season after the first interest rate cut since March 2020.
The Bank of England (BoE) has announced it will reduce the Base Rate to 5% this month, a reduction of 0.25%, and the first cut in four years which estate agents hope will bring down mortgage pricing and boost buyer demand. The Base Rate had been held at 5.25% since August 2023, after 14 consecutive rises.
The result only narrowly happened, as the Monetary Policy Committee voted by five to four to make the decision.
The move is good news for mortgage holders looking for rates to come down, as this marks a change of direction after the inflation rate reached the 2% target in May, before remaining there in June. When announcing the decision, the Bank’s governor Andrew Bailey warned that the move won’t lead to a rapid succession of rate cuts, saying that inflation needs to remain in check for further rate cuts.
Tom Bill, head of UK residential research at Knight Frank, said “the wait for the first rate cut since March 2020 and the hullabaloo of a general election was not a conducive combination for homebuyers this summer, many of whom switched off early for the holiday period. Now there has been a cut, demand and transaction activity will increase when the autumn market gets underway in September and more mortgage rates fall below the 4% psychological threshold.”
Investors expect one or two more rate reductions in 2024.
Andrew Lloyd, managing director at Search Acumen, said “the tide is now turning, signalling a shift in economic strategy. The Bank of England’s decision to cut interest rates today marks a significant turning point – the first base rate cut since 2020. The tide is now turning, signalling a shift in economic strategy that many hope will revitalise investment in real estate. For investors, this rate cut offers a glimmer of hope after a prolonged period of caution. Lower borrowing costs, along with more political stability now the election news has settled, should help to stimulate activity and encourage new acquisitions, too. If rates continue to decrease, we will see increased liquidity in the market as investors reassess their portfolios in light of more favourable financing conditions.
However, it’s important to match enthusiasm with realism. While this rate cut is a positive step, the market is not without challenges and the recovery of long-term occupier demand in particular is something we may not see for some time yet. Nevertheless, this decision could be the catalyst needed to start this journey and boost sector confidence. If rates return closer to 4% by the end of the year, we are also likely to see lenders to revise their risk appetites, potentially easing access to finance for developers and investors. Those who act decisively will find themselves better positioned to capitalise on emerging opportunities.”
Sam Mitchell, chief executive of Purplebricks, said “the housing market is finally kicking back into action following a pause for breath around the General Election. The Bank of England’s decision to cut interest rates today will supercharge this recovery. Already, buyers are leaving the market lull behind to forge ahead with purchasing decisions. However, for first-time buyers, the primary challenge remains firmly in place: the rental market is still a complete mess.
Labour will need to push ahead with their plans to ‘get Britain building’ and construct more social housing if it’s to lower the barriers to homeownership for first-time buyers. The hope is that these measures, when combined with rates coming down for landlords, should make the rental market more bearable for tenants and help them save for a deposit to finally become a homeowner.”
The Bank of England was quick to downplay the prospect of a flurry of rate cuts after its first reduction for more than four years, but experts said borrowing costs will likely come down further this year.
The cut from 5.25% to 5% was a very close decision, with a majority of just five of the nine members of the Monetary Policy Committee (MPC) voting for a reduction. It also saw the Bank move ahead of its counterparts at the US Federal Reserve, which late yesterday voted to hold rates once again. Economists said given the Bank’s cautious statement and the close vote, they are not expecting back-to-back cuts through the remainder of the year.
The decision to cut the base rate by 0.25% was finely balanced, but will be welcome news for businesses and households alike. It’s a sign that borrowing costs are likely to fall further - though how much further remains to be seen. As we look to next year, city economists are forecasting that it’s likely the base rate will fall to 4.6%–4.7% by the end of 2025.
What does the base rate cut mean for mortgages?
The cost of a mortgage is not directly set by the Bank of England official base rate. Lenders mainly source their finance for fixed rate mortgages in the money markets. The cost of this money is influenced by the expected direction of base rates, amongst other things. Most borrowers using a mortgage to buy a property are on fixed rate loans for 2 or 5 years.
Uncertainty over the outlook for the base rate over the last 3 years has led to the mortgage rate rising and falling between 4% and 6% for a typical 5 year fixed rate at 75% loan to value (LTV). These fluctuations have been driven by financial markets and their expectations for future borrowing costs.
At the start of 2024, there were expectations of several base rate cuts over the second half of the year. These expectations have been scaled back, and this explains why average mortgage rates have risen back above 4.5% for 5 year fixed rate loans in recent months.
Thursday's cut to the base rate may lead to mortgage rates returning to where they were earlier in the year. However, this depends on what the city thinks will happen to base rates into 2025.
Will Bank of England reduce rates again?
Mark Harris, chief executive of mortgage broker SPF Private Clients, says "the Bank of England will now have to decide whether to cut interest further. Finally, the Bank of England has made its much-anticipated move and cut interest rates from a 16-year high. This will give borrowers an affordability boost, ease pressure on household finances and in doing so, assist the wider economy.
Even if the new Labour government manages to magic up an additional 300,000 homes this year, there is still a serious affordability issue for first-time buyers. Any base rate reductions will be passed on via lower standard variable rates and to some extent headline rates, which will have a positive impact on borrowing boundaries. The next question is when the Bank will reduce rates again, and whether we will see another cut in September or November.”