Several major lenders are increasing their fixed mortgage rates, despite the Bank of England reducing the base rate to 4.75 percent on Thursday.

The Bank’s Monetary Policy Committee (MPC) decided to cut the bank rate by 5 percent, a widely expected move, although it is doubtful there will be further cuts this year.

Often, mortgage rates fall following a drop in interest rates, but the market has faced some volatility recently, with some lenders increasing their rates while others cutting theirs following lower interest rates. major geopolitical events.

Virgin Money and Halifax both increased their fixed rate deals by up to 0.25 per cent on Thursday, partly in response to the government’s rising borrowing costs following the budget.

Donald Trump’s victory in the US presidential election should also have an effect on possible future rate changes.

I explains the Bank’s decision to cut rates by 0.25 percentage points means for your mortgage.

What is happening to mortgage rates?

Many homeowners and first-time buyers are hoping for a reduction in fixed mortgage rates.

Although they are down from the post-mini-budget highs of almost 7 percent reached in 2022, they are still not at the low of 1 percent seen a few years ago.

In fact, some lenders are increasing rates while markets expect interest rates to remain at 4.75 percent in December.

David Hollingworth of broker L&C Mortgages said: “Most borrowers have continued to rate lock to benefit from the lower rates they offer compared to variable rate deals. Counterintuitively, these fixed rates have increased despite the reduction in the base rate, as the market’s perception of inflation and the rate outlook has changed.

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“Last week’s budget and the US election added a touch of uncertainty about future rate movements. This has already caused a wave of price changes, most of which result in fixed rates increasing.

“This is likely to continue unless markets are reassured by today’s decision and funding costs fall. In the meantime, lenders will continue to readjust their rates to find the right balance and level at which the market will stabilize.

Currently, the average two-year fixed rate is 5.42 percent while the average five-year rate is 5.13 percent.

However, other experts expect the trend to reverse and rates to fall.

Nick Mendes, of broker John Charcol, said rates were likely to return to the “best rates we’ve seen recently, with improvements expected next year”.

He said: “Borrowers should bear in mind that current fixed mortgage rates already reflect some of the planned bank rate reductions over the coming year.

“As a result, I expect the lowest fixed rates to stabilize around the low 3 percent range next year.”

Meanwhile, those on variable rates will automatically see their bills lower, as they rise and fall based on the base rate, although they are usually much higher.

Rachel Springall, financial expert at Moneyfactscompare.co.uk, said: “Over the last 12 months, mortgage rates have fallen and the average two-year fixed rate has fallen by almost 1 per cent.

“The push to abandon the standard variable rate (SVR) remains widespread, with the rate averaging just under 8 per cent.

“Any further cuts from the Bank may well be passed on to variable rates, but fixed rates remain significantly lower and should encourage borrowers to enter into a new deal. »

Why have mortgage rates increased?

Rates rose partly in response to the cost of borrowing following Rachel Reeves’ budget last week – Labour’s first in 14 years.

Experts also warned a victory for Trump could leave UK homeowners with higher mortgages for longer.

Government bond yields rose sharply after the Budget announcement last Wednesday, increasing the UK government’s borrowing costs and affecting swap rates – the main pricing mechanism for fixed-rate mortgages.

Since October 30, swap rates have been rising and lenders will likely be watching them closely.

However, some lenders have reduced their rates again recently and it is hoped that more will do so in the future.

What should you do if you are considering remortgaging?

If you are nearing the end of a fixed rate transaction, you may want to consider locking in a new rate. Most lenders allow you to do this up to six months before the end of your contract.

You can always upgrade to another, more attractive offer at that time if you wish.

At the time of writing, the cheapest two-year fixed rate on the market is 4.09 percent, while the cheapest five-year fixed rate is 3.94 percent, both with Nationwide.

For those on variable rates, it may be worth considering fixed rates, as these rates are often much cheaper.

Springall added: “Any reduction in the Bank of England base rate may well be considered by lenders, but there is no guarantee that the cuts will be passed on outside of the reference rates linked to the base rate.

Hollingworth said: “Although the base rate has fallen, fixed mortgage rates are still moving a lot, with many now rising in response to market expectations that rates may need to fall at a slower pace.

“Further reductions will still be expected next year, but borrowers currently considering a fixed rate should act quickly as there are likely to be further increases in the days and weeks ahead as the market adjusts .”

“As a result, borrowers may not see much benefit from a small reduction. The unprecedented volatility in interest rates seen over just the past five years could persuade borrowers to act now and secure a longer-term fixed deal for peace of mind.

“As has been the case for two years now, it is less expensive to do a two-year deal, based on average rates.”

What about penalties and fees?

For some borrowers, it will be possible to save money even after paying a prepayment penalty and the costs of the new transaction.

Whether you can save money or break even will depend primarily on your current interest rate and the interest rate of your new deal.

Most fixed rate deals have a prepayment fee, which is usually charged as a percentage of the outstanding loan amount, with the average being 3%, according to Rightmove.

There are also the costs of your new mortgage transaction to consider, such as arrangement fees and solicitors’ fees.

When will UK interest rates continue to fall?

The current bank rate is 4.75 percent, up from 5 percent at the November MPC meeting.

Before being reduced to 5 percent in August, it remained at 5.25 percent for several months – the highest level in 16 years.

The Bank’s final monetary policy decision ahead of next year will take place on December 19. The 2025 premiere will take place on February 6.

After a cut this week, most economists think it is unlikely the MPC, which meets about every six weeks, will cut rates again this year.

A Pantheon Macronomics article published after the budget but before today’s announcement said: “We continue to expect the MPC to reduce the discount rate by just 25 basis points per quarter, up to which it reaches 3.75 percent at the end of next year. An easing of 25 basis points (in November) remains likely, but we continue to expect no change in December.”

Looking further ahead to 2025, Chris Arcari, head of capital markets at Hymans Robertson, said he expects a slower pace of rate cuts throughout the year.

He said: “The early nature of the spending and the impact forecast by the Office for Budget Responsibility (OBR) on growth and inflation in the short term has led the market to expect a slower pace of decline rates from the Bank of England. »

The bank generally maintains high interest rates to combat high inflation and reduces them as inflation approaches its 2 percent target.