The bank rate has fallen to 5% we look at how this will affect your self build or renovation project and what you can expect to pay for your mortgage moving forward
Mortgage rate increases could decline now the BoE have decided to drop the base rate to 5%(Image credit: Getty)
Mortgage rates increases are expected to stabilise after the base rate fell for the first time since March 2022.
The average rate, according to Rightmove, for a two-year fixed rate mortgage stands at 6.12%, while a five-year fixed rate stands at 5.74%, a decline from 6.52% to 5.92% a year ago.
The declines will impact those looking for mortgages for self build or renovation projects and we explain what impact you will be likely to see.
Why have mortgage rates fallen?
The Bank of England's (BoE) base rate influences mortgage rates so any decline could prompt mortgage rate decreases.
A number of banks are set to drop their interest rates following the Bank of England's (BoE) decision to drop the rate from 5.25% to 5% on 1 August.
Rachel Reeves, Chancellor of the Exchequer commented on the base rate drop: "While today’s cut in interest rates will be welcome news, millions of families are still facing higher mortgage rates after the mini-budget.
"That is why this government is taking the difficult decisions now to fix the foundations of our economy after years of low growth, so we can rebuild Britain and make every part of our country better off.”
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Who is impacted by mortgage rate rises?
The recent base rate announcement will not affect all mortgages and mortgage options.
For those with fixed-rate mortgages, the rate rise will not affect them until their current deal expires. At that point, they would transition to their lender's standard variable rate (SVR) rate unless they opt for a new mortgage deal.
However, homeowners with tracker mortgage deals or variable rates will experience an immediate impact on their monthly payments due to the rise in mortgage rates as their rates are directly linked to the base rate.
How will self build mortgages be affected?
Self build mortgages differ from traditional mortgages as they serve as a short-term financing solution, typically lasting a couple of years to cover the duration of the construction process.
These mortgages are designed to support self builders by offering stage payments at crucial milestones throughout the building project, ensuring sufficient cash flow for the construction of their homes.
Since self build mortgages have shorter terms, they often come in the form of variable deals that align with the BoE base rate, rather than fixed-rate deals.
Also, as these deals are seen as risker by banks they are often charged at higher rates than standard mortgages.
Therefore, self builders could expect to pay even higher rates which could potentially create affordability challenges for some self builders.
Those looking to gain funding for their self build project or renovation may find less fluctuation in mortgage rates moving forward following the BoE's decision to drop the base rate to 5%(Image credit: Getty Images)
How will renovators be affected?
Those who are looking at funding options for renovating a house could find mortgage rates fluctuating less following the BoE's decision to drop the base rate to 5%.
Renovation mortgages, similar to conventional mortgages, will also be impacted if they are based on tracker or variable rates. In such cases, an increase in rates could result in higher monthly payments.
Although, those with fixed-rate renovation mortgages will not experience any changes until they need to remortgage.
Typically, a renovation mortgage is necessary when financing a property that requires significant repairs, conversion, or is considered uninhabitable. It allows borrowers to secure sufficient funds for the purpose of undertaking building work.
Self build mortgages may not be as expensive as expected moving forward due to the BoE's decision to drop the base rate to 5%(Image credit: Getty Images)
Will interest rates go down in the future?
With market activity remaining strong and inflation levels falling experts believe future cuts to the base rate are likely, albeit not in the immediate future.
Matt Smith, Rightmove’s mortgage expert explained that whilst the cut was expected any immediate fall in mortgage rates in unlikely.
He said the base rate decision "sets us up for hopefully further cuts to come, and when we have seen further reductions to the Base Rate, people should really start to see the impact".
He claims that the base rate could eventually fall to as low as 3.25% in the future but that this could take years.
News Editor Joseph has previously written for Today’s Media and Chambers & Partners, focusing on news for conveyancers and industry professionals. Joseph has just started his own self build project, building his own home on his family’s farm with planning permission for a timber frame, three-bedroom house in a one-acre field. The foundation work has already begun and he hopes to have the home built in the next year. Prior to this he renovated his family's home as well as doing several DIY projects, including installing a shower, building sheds, and livestock fences and shelters for the farm’s animals. Outside of homebuilding, Joseph loves rugby and has written for Rugby World, the world’s largest rugby magazine.
