Is Labour’s Plan to Lower Mortgage Rates Feasible?

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Homeowners have been contending with persistently high mortgage rates for almost two years now, with little relief in sight.

Data from Moneyfacts shows that average five-year fixed-rate mortgages remain above 5%, while two-year fixed-rate mortgages are close to 6%—a considerable increase from the low 2.5% averages seen in early 2022.

Labour’s recent campaign has promised transformative changes for the country, and a reduction in mortgage rates would undoubtedly be welcomed as a positive development by many homeowners. As the economic landscape continues to evolve, the prospect of lower mortgage costs could potentially alleviate financial pressures and stimulate greater confidence in the housing market.

The rise in mortgage rates can be linked, in part, to decisions made during the Conservative Government’s mini-Budget in 2022. The introduction of unfunded tax policies during this period sparked market uncertainty, leading to a significant uptick in average rates, which soared close to 7%.

In response to these economic challenges, Labour has outlined a strategy focused on delivering stability. Central to their approach are stringent spending rules aimed at fostering an environment conducive to lower mortgage rates. By prioritising fiscal responsibility and economic management, Labour aims to mitigate the impact of previous policy decisions and provide reassurance to homeowners facing higher borrowing costs.

Can the Government influence interest rates?

Labour’s commitment to maintaining low mortgage rates has sparked debate among economists, who argue that the party’s influence on this issue may be limited. The key factor at play is the setting of interest rates, which directly affects mortgage rates, and this responsibility lies with the independent Bank of England rather than the Government.

Andrew Wishart, a senior economist at Capital Economics, points out: “The Government’s ability to directly control mortgage rates is quite constrained. The forthcoming election is unlikely to bring about substantial changes to the base rate, given the similarity in fiscal policies across parties. However, Labour’s approach of signalling caution could potentially prevent scenarios where interest rates are raised, in contrast to previous economic strategies.”

The discussion underscores the intricate relationship between political promises and economic realities, highlighting the complexities involved in shaping financial policies that impact homeowners and the broader housing market.

Interest rates are falling anyway

While Labour’s ability to directly influence interest rates is limited, its assumption of power may coincide with a favourable trend towards lower rates. Recent developments have seen several major mortgage lenders, including Barclays and HSBC, taking steps to reduce their rates this week.

Looking ahead, there is speculation that the Bank of England could embark on a path of interest rate cuts later this year, contingent upon the successful management of inflationary pressures. In May, the Consumer Prices Index inflation eased back to the Bank of England’s targeted 2%, marking a notable decline from its peak of 11.1% observed in October 2022 and the lowest level recorded since July 2021.

These developments suggest a potential shift towards a more accommodative monetary policy environment, which could have significant implications for mortgage affordability and overall economic stability under Labour’s governance. However, the extent and timing of these changes remain contingent upon broader economic conditions and policy decisions by the central bank.

Since August 2023, the Bank of England has maintained the base rate at 5.25%, but there is a growing sense in the markets that the first rate cut could be on the horizon for late summer.

David Hollingworth, associate director at L&C Mortgages, notes, “With inflation now back within the Bank of England’s target range, there is increasing speculation that the new Government may soon announce a base rate reduction, assuming inflation remains stable over the longer term.”

Despite these expectations, the initial base rate cut may not necessarily translate into a substantial decrease in fixed mortgage rates. Lenders typically set their mortgage rates based on broader market expectations regarding future interest rate movements. Given that the financial markets have already priced in the anticipated base rate cut for later this summer, any immediate impact on mortgage rates might be tempered.

Looking ahead, the timing and magnitude of any base rate adjustment will hinge on ongoing economic conditions and inflation trends, influencing how lenders respond and borrowers plan their financial strategies in the months ahead.

Where are mortgage rates going next?

Mortgage rates began the year with a downward trend, as expectations for base rate cuts surged in the markets. However, this trend quickly reversed in early spring, leading to a flurry of increases in mortgage rates.

Market forecasts now anticipate the base rate to decrease to approximately 3.5% over the next two years. David Hollingworth of L&C Mortgages explains, “Even if a base rate cut occurs in August, we may not see significant movement in fixed mortgage rates immediately. However, if market sentiment suggests deeper and faster cuts, this could impact rates.”

Currently, the lowest two-year fixed rates hover just above 4.6%, while the lowest five-year fixed rates are slightly above 4.2%. Earlier this year, when markets anticipated up to six base rate cuts in 2024 alone, these rates were around 4.2% and below 4% respectively.

Richard Donnell, head of research at Zoopla, believes that the lowest mortgage rates are unlikely to see dramatic changes in the near future. He anticipates mortgage rates to remain in the range of 3.75% to 4.5%, even as the base rate is expected to fall to 3.25% or 3.5% over the next 12 to 24 months. Donnell notes, “Today’s mortgage rates already account for anticipated base rate cuts, though they remain low compared to historical standards, especially considering the very low borrowing costs seen during periods of quantitative easing.”