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A Word on the Mortgage Market – Feb 2025

A Word on the Mortgage Market

Welcome to the latest edition of A word on the mortgage market. It’s a little on the late side (okay, a lot) but as this is the first time we are entering your inbox in 2025, Happy New Year. Hopefully that will be the last time you hear that, hey? Anyway, back to why you are reading this. As ever, much is happening in the world that affects mortgages, so we will try and navigate you through.

As always, we hope you find A word on the mortgage market useful and informative. If you would like to discuss any of it and what it means for you then please get in touch with your consultant, whose details you will find towards the end of this note. Let’s jump in.

Bank of England Cuts Rates: More to Come?

In a word, yes. Yesterday, the Bank of England’s Monetary Policy Committee (MPC) voted to cut the base rate to 4.5%, down from 4.75%. This move was widely expected, with traders now forecasting two to three more rate cuts before the year ends. Interestingly, seven of the nine members voted to cut by 0.25%, and two of them wanted more – a 0.5% cut. This bodes well for future cuts. No matter what, we expect base rate to drop to at least 4% by the end of the year.

However, a word (or two) of caution. Financial markets remain highly volatile. The economic landscape has shifted rapidly over the last few years, and surprises have become the norm rather than the exception. If inflation data worsens or economic growth picks up unexpectedly, we may not see all of the predicted cuts. On the flip side, if inflation slows faster than anticipated, or if external shocks (such as geopolitical instability or weak global growth) put pressure on the economy, further rate reductions could be on the cards.

What’s Driving This Uncertainty?

Several key factors will shape the Bank of England’s next moves:

  • Inflation Trends: The BoE’s primary concern is getting inflation back to its 2% target. While inflation has been falling, some price pressures remain, particularly in areas like services and energy costs.

  • Wage Growth & Employment: Slower wage growth and a cooling job market could reinforce the need for cuts, while a tight labour market could delay them.

  • Government Fiscal Policy:Any tax changes or government spending decisions could influence the need for rate adjustments.

As always, our key advice remains unchanged. Stay in close contact with your adviser to ensure you’re prepared for whatever comes next. Of course, what happens in the UK is crucial, but we need to look further afield for additional guidance. Luckily, that’s just what we’re about to do.

Across the Ponds: The Fed and ECB Moves

In the US The Fed Holds Steady

Last week, the U.S. Federal Reserve held interest rates steady at 4.25%–4.5%, resisting political pressure to cut sooner rather than later.

U.S. President, Donald Trump, has been vocal in his calls for aggressive rate cuts, arguing that borrowing costs should be much lower. However, Fed Chair Jay Powell pushed back, describing this as a “pause moment”, suggesting the bank is not in a rush to cut rates, given continued uncertainty about the economy’s direction.

The key issue? Inflation. The Fed’s target is 2%, but the latest data shows it’s still sitting at 2.9%. While progress has been made, policymakers want to see clearer signs of inflation stabilising before they take action.

What’s Next for the U.S. Economy?

Economists now expect the first Fed rate cut in July rather than June. But other factors could shake things up, including:

  • The impact of Trump’s proposed policies – His campaign has hinted at new trade barriers, tax cuts, and mass deportations, all of which could have significant economic consequences.

  • Market expectations vs reality – While traders still anticipate two Fed rate cuts this year, if inflation remains sticky, that timeline could be pushed further out.

In Europe, the ECB Moves First

Meanwhile, the European Central Bank (ECB) took the lead in cutting rates, announcing a 0.25% reduction, to 2.75%.

Unlike the U.S. and UK, where inflation remains slightly elevated, the eurozone is facing a different challenge, a slowing economy. Wage growth is cooling, price pressures are diminishing, and corporate profits are helping absorb costs. However, the ECB has been clear that it won’t commit to a fixed rate-cutting cycle. Instead, future decisions will be purely data-driven to ensure inflation remains under control.

 

Swap Rates: A Smoother Ride

Our customary word on Swaps. To remind you, as we always do, Swap rates are a type of interest rate used in the financial markets and one of the biggest factors influencing mortgage pricing.

Over the last few months, Swap rates have been on something of a rollercoaster, though perhaps more of a family-friendly thrill ride than a terrifying freefall. Recently, we’ve seen a modest downward shift, which is a positive sign for borrowers. 5-year Swap rates are now at 3.77%, down from 4.1% a month ago.

While this may not seem like a dramatic drop, any sustained decrease in Swap rates typically feeds through into mortgage pricing, potentially leading to more competitive fixed-rate deals in the coming months. Potentially…

What Does This Mean for Mortgage Rates?

Given the general uncertainty, two key decisions are at play when it comes to deciding what mortgage to take next. And that’s fixed vs variable, and short-term vs long-term. Whilst no amount of generic advice will do, it probably pays to provide some guidance.

In the 2-year market, at 75% loan to value, fixed rates currently start at around 4.5%. If you want to fix for 5 years, then that rate is lower, but only marginally, starting at around 4.35%. Not much difference there. In the variable market, 2-year deals (on the same basis) start at 4.9%, with 5-year deals at 5.7%.

So, the difference between 2-year fixes and 2-year trackers is currently 0.4% With the expectation of two more cuts (i.e. 0.5%) this year, fixed rates and variable will have broadly the same monthly pay rate. Therefore, the potential benefit of taking a 2-year variable rate over a fixed rate depends on how quickly the cuts come.

In the 5-year market, the difference in rates is more pronounced, at around 1.35%. Yet, statement of the obvious time, 5 years is a long time and who knows what might happen in that timeframe. Again, at the risk of repetition, only regular contact with your adviser will help you decide the right route for you.

And finally: It pays to be protected

Something that we have been thinking about recently are the indirect consequences of low growth and increase in NI Contributions and that people may unwittingly be future victims of redundancies. Not. nice thought, but perhaps something we should all be prepared for.

Accident, Sickness, and Unemployment (ASU) insurance is a type of short-term income protection designed to help cover your mortgage, rent, or essential bills if you’re unable to work due to illness, injury, or redundancy.

Why is ASU Protection Important?

  • Financial Security: Provides a monthly income (typically for up to 12 months) to help cover essential expenses if you can’t work.

  • Peace of Mind: Reduces financial stress during unexpected job loss or illness, allowing you to focus on recovery or finding new employment.

  • Flexible Cover: Policies can be tailored to your needs, whether you want cover for accidents and sickness only, unemployment only, or a combination of all three.

  • Bridges the Gap: Many employers offer limited sick pay, and state benefits may not be enough to cover mortgage payments or other key expenses.

Who Should Consider ASU Insurance?

If you rely on a regular income to meet financial commitments—especially if you have a mortgage, rent, or family to support—ASU protection can be a lifeline in difficult times.

Final Thought

While no one expects to fall ill or lose their job, having ASU in place ensures you won’t be caught off guard. Given the uncertain economic climate, a little protection now can make a big difference later.