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Director and Head of Protection Barry Jones was recently asked by Nerdwallet for a commentary on interest rates and inflation. Take a look at the full article written by Tim Leanord here.

Fixed-rate mortgages look like they could continue to drop, while inflation expectations and threat of a banking crisis have the potential to halt Bank of England base rate rises. Read on for our mortgage rate predictions for April.

UK mortgage rate forecast for April

Making mortgage rate predictions remains a hazardous occupation, particularly against a backdrop of a surprise rise in UK inflation in February and the uncertainty created by the collapse and rescue of Silicon Valley Bank (SVB) and Credit Suisse. 

That said, our forecast on the direction of travel for mortgage rates and the base rate of interest last month proved pretty accurate. The early signs are that fixed-rate mortgages could continue to drop lower in April, carrying on the trend of moving in the opposite direction to the base rate of interest, which the Bank of England’s Monetary Policy Committee (MPC) voted to increase by a further 0.25% to 4.25% on 23 March.

On the other hand, the Bank’s decision means that borrowers with tracker mortgages will see their mortgage rates, and monthly repayments, rise yet again in April. However, with consensus seeming to grow that the slew of base rate rises seen since December 2021 may be nearing an end, there could be a glimmer of light for those with a variable rate mortgage. 

Fixed rates drop to six-month lows 

The average rates lenders are offering on two- and five-year fixed-rate mortgages have now been dropping for four months in a row, as the retreat from the highs recorded in the aftermath of last September’s mini-budget continued. 

According to Moneyfacts, the average rate of 5.32% on two-year fixed-rate mortgages and  5% on five-year fixed-rate mortgages means the cost of typical mortgages over both terms are now at their lowest for six months. 

At the same time, longer-term mortgages continue to be the area of the market where lenders are cutting rates most significantly.  

Following the latest round of rate reductions, the average rate on five-year fixed mortgages is now 0.32% lower than for two-year fixed-rate mortgages – the widest gap seen in this scenario since early 2008. 

“Fixed-rate mortgages are considerably better priced than in Q3/Q4 2022 but still have a way to reduce to fall into line with base rate expectation,” says Barry Jones, head of financial planning at Watts Mortgage and Wealth Management.

Further fixed-rate falls possible  

As to whether fixed-rate mortgage rates have the potential to carry on falling, some recent repricing announcements by a number of major UK lenders seem to suggest they could. 

On the same day in March that the Bank of England confirmed the base rate would be rising for the 11th time in a row, Nationwide revealed it was reducing various fixed rates by up to 0.45%. 

Clydesdale Bank and HSBC have followed with similar moves, so does this suggest there could be more rate reductions to come?

“It can be confusing to consumers when they see lending rates fall while base rate is increased, but this is not unusual,” says Jones. “We would expect fixed rates to continue to fall in line not with base rate today, but expectation for borrowing costs over the medium term. As banks become more confident that we are nearing the peak of interest rates, and this will likely be clarified further as inflation falls in the second half of the year, rates are very likely to respond in kind.”

Variable rate mortgages head higher again 

The March increase in the base rate of interest to 4.25% means predictions for where variable rate mortgage rates will be heading in April are fairly straightforward.

As tracker mortgage rates automatically follow changes in the base rate, a typical tracker mortgage borrower can now expect to see another rise in their monthly repayments.

While lenders have discretion over whether they alter their standard variable rate (SVR), and by how much, typical borrowers who are sitting on this rate – usually because they didn’t remortgage when their fixed-rate deal came to an end – are expected to see repayments increase too.

Moneyfacts says the average SVR is already standing at 7.12%, a high not seen since October 2008, but this now seems certain to go higher.

Is the base rate nearing its peak? 

In terms of what might happen to the base rate of interest at the next Bank announcement on 11 May, could we see MPC members pause for breath and vote for no change?  

“It’s general consensus, following the base rate increase to 4.25%, that we are nearing the peak of interest rates before they plateau and start to reduce,” says Jones. “The more cautious 0.25% increase, after a series of higher increases, is a clear signal that the MPC feels they should proceed with caution.”

Before the announcement of the unexpected rise in Consumer Prices Index (CPI) inflation to 10.4% in February, up from 10.1% in January, it was being billed as a split decision as to whether rates would be maintained or pushed higher in March. Despite that surprise rise, it’s thought generally that inflation could still be on course to decrease in the coming months – the latest Office for Budget Responsibility (OBR) forecasts suggest the CPI rate could fall to around 3% in the final quarter of 2023. 

If that remains true, the need for further rate rises to dampen inflationary pressures is likely to diminish, as the Bank can wait for the increases it has already made to take full effect. 

“The incoming data appears to be weakening the case for further rate rises… there’s a good chance the MPC will be mulling rate cuts by the end of this year,” says Martin Beck, chief economic advisor to UK economic forecast group the EY ITEM Club.

The potential influence of a banking crisis 

At the same time, recent developments in the global banking sector – or more specifically the failure of SVB and forced purchase of Credit Suisse by UBS – also have the potential to weigh heavily on the interest rate decisions that the Bank of England and other central banks around the world make going forward. 

Amid concerns that the turbulence could spread and a new banking crisis was about to take hold, some economists doubted whether another rise in the base rate would be sensible in March, while others even suggested a cut in rates might be warranted. In the end, the Bank’s belief in the UK banking system’s “robust capital and strong liquidity positions”, alongside the shock inflation increase, tipped the balance towards the 0.25% rise. 

However, looking ahead, and depending on how the “crisis of confidence in banks” develops, Jones believes that central banks making base rate decisions may have “further reasons to slow down the rate of increase and potentially pivot to begin reducing them”. 

If you would like to discuss your mortgage, you can speak to our team on 01270 620555 or click here to get a quote.