The Bank of England base rate is set to fall, offering some good news for UK homeowners with tracker mortgages. This could mean a potential monthly saving of £300 by the end of the year.
There are currently around 1.5 million UK homeowners with a variable rate mortgage linked to the Bank of England's base rate, which is now at 5.25% plus a set margin.
However, given the continued increases in the base rate from 2021 until August 2023, many of these homeowners are looking forward to some financial breathing space.
Planned Changes for Tracker Mortgages
According to analysts at Capital Economics, the base rate will be cut for the first time in over four years in June. They forecast a further cut of 0.25 percentage points at the next meeting.
The base rate is likely to be 4% by the end of the year, before falling back to 3% in 2025. I can't say with great certainty that the first fall will be in June, but that's our current forecast.
The prime rate back in January 2023 was relatively low and the average two-year variable rate was 4.48%, according to data company Moneyfacts.
Currently, a landlord with a balance of £300,000 on a 25-year mortgage would pay a monthly amount of £1,959 based on an average variable rate of 6.14%. But, should the variable rate fall to 4.48% by the end of the year, the monthly payment could be reduced by £295 to £1,664.
Mr Dales commented: "When the base rate falls, those on a variable rate contract will be the first to benefit, which will be very welcome as they have been hit harder than others. With the fall in the base rate, more homeowners could opt for variable mortgages. It's clear that rates won't go up again, so those feeling brave could opt for one."
Cautions Before Taking a Variable Rate Mortgage
For those considering variable rates, Hollingworth advises looking carefully at the terms and conditions, as some contracts may have minimum thresholds, such as a 4% tunnel, where the rate remains at 4% even if the base rate falls to 3% the following year.
"Check twice, because you don't want to run the risk of an increase without the benefits of a decrease," he warns.
Moneyfacts reports average two-year fixed rates at 5.8% and five-year fixed rates at 5.38%. These rates have fallen from almost 7% in July 2023.
Currently, the best two-year fixed offer is 4.43% from Progressive Building Society, and the best five-year offer is 4.18% from NatWest. In contrast, the best two-year variable rate is 5.4% from Barclays.
Some estimates suggest that the main fixed-rate contracts could soon fall below 4%, as lenders gradually adjust their rates in anticipation of the policy change scheduled for June.
Recent Mortgage Approvals
Mortgage approvals have reached its highest level since the turmoil caused by Liz Truss's aborted tax plans. Residential purchase approvals rose from 56,100 to 60,400 between January and February, and remortgaging approvals rose from 30,900 to 37,700.
Based on Nationwide data, house prices fell by 0.2% between February and March, but rose by 1.6% compared to the same month last year.
Predicted Changes in Mortgage Rates
| Mortgage Type | Current Rate | Predicted Rate by Year's End |
|---|---|---|
| Variable | 6.14% | 4.48% |
| Two-year Fix | 5.8% | <4% |
| Five-year Fix | 5.38% | <4% |
Overall, the anticipated cut in the Bank of England base rate could mean significant savings for UK homeowners with mortgages. However, homeowners need to consider their mortgage options carefully and keep abreast of market changes as they occur.