Can Labour really cut mortgage rates?

Higher mortgage rates have been hitting homeowners for most of the past two years.

Average five-year fixed-rate mortgages remain above 5 percent, while two-year fixed-rate mortgages are closer to 6 percent, according to Moneyfacts, a far cry from the 2.5 percent averages seen at the start of 2022.

The Labour campaign promised change for the country, and falling mortgage rates would certainly represent a positive change for many.

Higher mortgage rates are partly due to the Conservative government’s 2022 mini-budget, when unfunded fiscal policies sparked panic in the market and caused average rates to soar to near 7 percent.

Now Labour is saying it will deliver economic stability, with strict spending rules to keep mortgage rates as low as possible.

Can the Government influence interest rates?

Although Labour has promised to keep mortgage rates low, economists say the party may actually have little influence on the issue.

This is because interest rates, which in turn influence mortgage rates, are set by the Bank of England, which is independent of the Government.

Andrew Wishart, senior economist at Capital Economics, says: “The government has little control over mortgage rates and, given the limited difference in the parties’ fiscal plans, there is little reason for the election to change the outlook for the base rate.

That said, while signalling that it will be cautious, a Labour government should avoid raising interest rates as Liz Truss’s “plan for growth” did.

Interest rates are falling anyway

But even if the Labour Party has little or no control over the direction of interest rates, it may have come to power at just the right time to see interest rates begin to fall.

Some mortgage lenders are already cutting rates, with Barclays, HSBC and others doing so this week.

The Bank of England is expected to start cutting interest rates this year, once inflation is under control.

Consumer price index inflation fell to the Bank of England’s 2 percent target in May.

This means that inflation has now fallen to its lowest level since July 2021 and has come down sharply from the peak of 11.1 percent reached in October 2022.

While the Bank of England has continued to keep the base rate at 5.25 percent since August 2023, markets are confident that the first cut will come in late summer.

David Hollingworth, associate director at L&C Mortgages, said: “The inflation rate is back on target for the Bank of England, and if that starts to look more sustainable over the longer term, the new government could soon see a cut in the base rate.”

However, the first cut in the base rate may not lead to a drastic reduction in fixed mortgage rates.

This is because lenders set their rates based on broader market expectations of where interest rates are headed, and money markets have already “priced in” a base rate cut in the summer.

Where will mortgage rates go in the future?

Mortgage rates started this year on a downward trajectory and markets sharply raised expectations for base rate cuts.

This situation was then quickly reversed and a wave of mortgage rate hikes began in early spring.

Markets now forecast the base rate will fall to around 3.5 percent over the next two years.

Hollingworth says: ‘Even if the base rate is cut in August, there may not be much movement in fixed mortgage rates.

‘However, if markets perceive that rates can be cut more sharply and more quickly, this could have an influence.

‘Fixed rates will always fluctuate based on sentiment, and in recent months we’ve seen rates edge up slightly before recent cuts undid some of those increases.’

Currently, the lowest two-year corrections hover just above 4.6 percent, while the lowest five-year corrections hover just above 4.2 percent.

At the start of the year, when markets were expecting six base rate cuts in 2024 alone, the lowest two-year fixed rates were around 4.2 percent and the lowest five-year fixed rates were below 4 percent.

Richard Donnell, head of research at Zoopla, believes lower mortgage rates are unlikely to change dramatically in the short term and does not expect them to go beyond the lows seen earlier this year.

“Current mortgage rates already presuppose some cuts in the base rate,” says Donnell.

The base rate is projected to fall to 3.25 percent or 3.5 percent over the next 12 to 24 months, but mortgage rates appear to remain in the 3.75 percent to 4.5 percent range.

‘This is low by historical standards, but not by the recent past, when quantitative easing kept borrowing costs very low.’