Is Britain’s mortgage hell finally over?

On the face of things, it looks like a very happy new year for mortgage borrowers. Some of Britain’s biggest lenders have been announcing rate cuts. Halifax, the latest to move, has shaved as much as a full percentage point off some of its products. Meanwhile, HSBC has promised to follow up with cuts of its own in what brokers describe as a “fast-moving market”.

After a miserable 2023 in which rates shot up like a world champion pole vaulter, Bank of England base rates hit 5.25 per cent before the Monetary Policy Committee (MPC) pressed pause – 2024 could hardly have started better for the housing market. The speed at which mortgage prices have come down has caught some analysts by surprise. What on earth is going on?

The first big driver is the City’s expectation that the MPC will move a lot quicker to reduce rates than it has so far indicated that it is willing to do. Remember, the two- and five-year fixed rate deals that most people sign up for when they’re buying a home are priced not just on today’s base rate but on market expectations for the future.

What is called the interest rate swaps market plays a key role – and that market currently reflects a widespread view that the Bank will cut rates in the spring and then follow up with at least one further reduction, possibly more.

It is worth remembering that the MPC has so far done little to encourage this. Three of its nine members actually voted to increase rates at their December meeting and the accompanying comments suggested that there would be no downward move until at least the third quarter of this year. The latest round of mortgage price cuts may not be sustained if the committee reiterates this view on 1 February, when the next scheduled interest rate decision is due.

However, the cuts aren’t solely down to the City getting (over?) excited. We are also only three months away from the end of the current financial year. The big lenders haven’t been getting much action with the housing market in a slough of despond. Part of the motivation for cutting rates now may be to tempt borrowers back into the market. Banks make money by lending it out. It doesn’t do them much good to be sitting on it. Cutting prices – even if that means sacrificing a little margin – is therefore good business.

Competition plays a role too. Now that the Halifax – a certified big gun – has moved, those who were hanging back have little choice but to follow suit. This helps to explain HSBC’s decision.

More good news for potential buyers is that even with mortgage prices falling, there isn’t much expectation that house prices will take off in response. In its review of the year and outlook for 2024, Halifax predicted a fall in prices of between 2 and 4 per cent through 2024. Nationwide was more cautious – it forecast between zero and 2 per cent. I have previously talked about a “goldilocks zone” of mortgage rates falling while house prices are becalmed. We will probably reach that at some point this year. Things will look even brighter if borrowers shop around. Halifax has, remember, cut some of its rates. But not all of them.

That is not to suggest that buyers have it easy. To the contrary. Nationwide’s chief economist Robert Gardner points out that the level of deposit required for a typical first-time buyer home represents a big hurdle to clear even with mortgage rates coming down.

Potential buyers would also be wise to bear this in mind: even if the City is right and the MPC does cut sooner than it has suggested it will, the era of rock-bottom rates isn’t likely to return in a hurry.

Since the Bank of England first set a rate in 1694, the average stands at 5.94 per cent, compared to today’s 5.25 per cent. However, if we look purely at more modern times, the average since 1970 increases to 9.01 per cent. It is 8.57 per cent since 1980 and 5.2 per cent since 1990.

The string of rate rises that ended at 5.25 per cent has come as a horrible shock to borrowers, who have seen their housing costs jump by hundreds of pounds a month. Renters have been similarly affected because of the impact of rising rates on landlords who passed on their increased costs. However, what the above numbers show is that today’s rates are pretty typical by historic standards.

People looking at buying or remortgaging now would be wise to bear that in mind when it comes to calculating how much debt they are prepared to take on. Mortgages are getting cheaper and that is unequivocally good news. But the rock-bottom prices we’ve got used to are an anomaly. Sorry to spoil the party.