Can a Labour really bring down mortgage rates?

Higher mortgage rates have been battering homeowners for the best part of two years.

Average five-year fixed rate mortgages remain above 5 per cent while two-year fixed rate mortgages are close to 6 per cent, according to Moneyfacts – a far cry from the 2.5 per cent averages seen in early 2022.  

Labour’s campaign promised change for the country – and falling mortgage rates would certainly represent a positive change for many.

Higher mortgage rates are due in part to the Conservative Government’s mini-Budget in 2022, when unfunded tax policies caused a market panic and sent average rates soaring close to 7 per cent. 

Now Labour claims it will deliver economic stability, with tough spending rules to keep mortgage rates as low as possible.

Can the Government influence interest rates? 

While Labour is promising to keep mortgage rates low, economists are pointing out that the party may actually have little sway over the matter. 

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

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

‘That said, by signaling it will be cautious, a Labour administration should avoid pushing up interest rates in the way Liz Truss’ “plan for growth” did.’

Interest rates are falling anyway 

But even if Labour 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 start to fall.

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

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

Consumer prices index inflation fell back to the Bank of England’s 2 per cent target in May.

This means inflation has now dropped to its lowest level since July 2021 and is dramatically down from the 11.1 per cent peak reached in October 2022.

Rate setter: The base rate is controlled by the Bank of England,  and not the Government

While the Bank of England has continued to hold base rate at 5.25 per cent since August 2023, markets are confident that the first cut will arrive in late summer.

David Hollingworth, associate director at L&C Mortgages says: ‘The rate of inflation came back to the Bank of England’s target, and if that begins to look like it’s more sustainable in the longer run, the new Government could see a base rate cut coming soon.’

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

This is because lenders set their rates based on wider market expectations about where interest rates are heading – and the money markets have already ‘priced in’ a base rate cut in the summer. 

Where are mortgage rates going next?  

Mortgage rates started this year on a downward trajectory, with markets having dramatically increased expectations of base rate cuts. 

This then swiftly reversed and early spring saw a rush of mortgage rate rises. 

Markets are now forecasting base rate to fall to around 3.5 per cent over the next two years. 

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

‘If markets feel that rates may be cut harder and faster, though, then this could have a bearing.

‘Fixed rates will always fluctuate according to sentiment, and in recent months we’ve seen rates edge up before recent cuts unwinding some of those increases.’

At present, the lowest two-year fixes are hovering just above 4.6 per cent while the lowest five-year fixes are hovering just above the 4.2 per cent mark.

Earlier in the year, when markets were expecting six base rate cuts in 2024 alone, the lowest two-year fixes rates were hovering around 4.2 per cent and the lowest five-year fixes were below 4 per cent.

Richard Donnell, head of research at Zoopla thinks the lowest mortgage rates are unlikely to change drastically anytime soon and he is not expecting rates to surpass the lows seen at the start of this year.

‘Todays mortgage rates already assumes some base rate cuts,’ says Donnell.

‘Base rate is projected to fall to either 3.25 per cent or 3.5 per cent over the next 12-24 months but mortgage rates look to remain in the 3.75 per cent to 4.5 per cent range. 

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