Homebuyers turn cautious as fixed mortgage rates rise despite Bank rate hold

UK homebuyers are expected to become more cautious through the autumn despite the Bank of England keeping its benchmark interest rate unchanged, as rising fixed mortgage costs and uncertainty over the forthcoming Budget weigh on the housing market.

The Bank held its base rate at 3.75% on Thursday. But mortgage pricing has continued to move higher, with financial markets pushing up swap rates, which lenders use to price fixed-rate home loans.

Moneyfacts said the average five-year fixed-rate homeowner mortgage had risen to 5.87% on Thursday, its highest level since November 2023, from 5.81% a day earlier.

Several lenders have increased fixed mortgage rates in recent weeks as swap rates have risen, illustrating the disconnect between the Bank’s current policy rate and the cost of borrowing available to households.

Stephen Gomez, a mortgage adviser at Wesleyan, said: “A (Bank of England base rate) hold is not a pause button for mortgage costs.

“Fixed mortgage rates are influenced by what financial markets expect to happen next, so lenders can increase their prices even when the Bank of England makes no change.”

Susannah Streeter, chief investment strategist at Wealth Club, said: “Fixed mortgage rates are guided by swap rates, which reflect expectations for where interest rates are heading, rather than simply where (the Bank of England base rate) stands today.

“With markets still pricing in further rate hikes, swap rates have been pushed higher, and lenders have already been raising some fixed mortgage rates.”

The higher cost of fixed-rate borrowing is also changing the choices available to borrowers. Simon Gammon, managing partner at Knight Frank Finance, said the Bank’s decision “won’t provide much comfort to mortgage borrowers”.

He added: “The rise in fixed rates has made trackers, which still sit close to 4%, much more attractive.

“We are seeing more borrowers – particularly those with larger loans – accept some exposure to potential future increases in the base rate in exchange for lower outgoings.

“The combination of elevated mortgage rates and uncertainty over the upcoming Budget is likely to make this another subdued autumn selling season.”

The outlook for transaction volumes is being tempered by the wider balance of supply and demand. Emily Williams, director of research at Savills, said: “Despite today’s MPC (Bank of England monetary policy committee) decision to hold rates, we do expect to see more caution from buyers in the coming months given the increases to fixed-rate mortgages over the last fortnight.

“However, buyers can take confidence from the housing market’s resilience so far this year.”

Nicky Stevenson, managing director of Fine & Country, said the market was “firmly price sensitive”.

She said: “Mortgage costs are still weighing on affordability, while buyers have a high level of choice and can afford to be selective.”

That greater supply is shifting negotiating power towards buyers, according to estate agents.

Mark Manning, managing director of Northern Estate Agencies Group, which owns Manning Stainton, Ryder & Dutton and Mortimers, said: “buyers have significantly more choice than they have been used to, and that has shifted the balance of power to them.

“This, combined with slightly higher mortgage rates, means that sellers need to price their properties realistically in order to attract potential buyers and sell quickly.”

Alice Haine, head of personal finance at Hargreaves Lansdown, said the rise in mortgage pricing could put further pressure on household affordability.

“Several major lenders have already nudged mortgage rates up this month, which will test affordability for both homeowners approaching the end of a fixed-rate deal and first-time buyers trying to get onto the property ladder.”

For savers, however, the higher-rate environment offers a different set of incentives.

Haine said: “For savers, the outlook is brighter.

“Competitive savings rates are back, giving cash a greater opportunity to outpace inflation and work harder.

“Those with money festering in an account paying a meagre rate risk missing out unless they shop around for a better deal.

“Few things are more frustrating for savers than watching inflation steadily erode the spending power of cash.”

The combination of higher fixed mortgage rates, abundant housing stock and uncertainty around the Budget means the Bank’s decision to leave the base rate unchanged is unlikely to remove the pressure on buyers and sellers as the autumn market approaches.