How far will UK mortgage rates fall?

Mortgage rates have eased in recent weeks as lenders rush to reprice deals following positive data about the UK economy, an uptick in house sales and growing expectations that interest rates have peaked.

The average cost of a two-year fixed mortgage fell on Thursday to 5.9 per cent, according to data provider Moneyfacts. That is down from a 15-year high of 6.85 per cent in August 2023 but well above 2.4 per cent in early 2022.

Between 1.5mn and 2mn households are set to reach the end of cheap deals in the next 12 months and home affordability is rising up the political agenda, putting pressure on Prime Minister Rishi Sunak to defuse a potential election-year time bomb.

Why are mortgage rates falling?

A bigger than expected drop in consumer price inflation to 3.9 per cent in November raised hopes that the Bank of England would begin cutting its benchmark interest rate from 5.25 per cent in the first half of 2024.

The improved outlook, along with pent-up demand for homes after house prices fell at the fastest pace in more than a decade, is driving mortgage providers to make products more competitive in anticipation of rising sales.

NatWest on Thursday became the latest big high-street lender to cut rates across its residential and buy-to-let range, following reductions by HSBC on Wednesday. Rivals Nationwide, Halifax, Virgin and Barclays have announced similar moves since the end of November.

The BoE’s decision to leave the cost of borrowing at a 15-year high in December had also been “pivotal” in uplifting property market sentiment, said Charles Breen, founder of brokerage Montgomery Financial.

The better market conditions were reflected in figures published by the central bank on Thursday, which showed that mortgage approvals rose more than expected and to a five-month high in November.

How far are mortgage rates likely to fall?

Falls in swap rates, which inform lenders’ decisions around the pricing of fixed deals, indicate mortgage rates are likely to decline further in coming weeks.

Financial markets’ expectations of interest rate cuts have pushed the 5-year interest swap rate to 3.4 per cent now; it was above 4.5 per cent in October. The drop suggests that 5-year fixed mortgage rates could dip below 4 per cent this month, according to consultancy Capital Economics. 

In the same period, the 2-year interest swap rate has fallen to 4.1 per cent, meaning the average 2-year fixed mortgage rate could be close to 4.5 per cent by the end of this month.

Economists have warned, however, that further big falls in mortgage rates are unlikely before the BoE starts lowering its benchmark interest rate.

At the same time, mortgage rates could register another sharp rise this year if stronger economic activity, buoyed by renewed confidence, prevented the central bank from cutting the cost of borrowing, according to Andrew Wishart, senior property economist at Capital Economics.

What does this mean for the general election?

Access to property is set to be a key battleground in the election, which Sunak has signalled will take place in the autumn.

Respondents to the latest Financial Times survey of economists said between 1.5mn and 2mn households renewing mortgages would face much higher costs.

Under current forecasts, which would see mortgage rates fall below 4 per cent in the second half of this year, Capital Economics expects some mortgage holders due to come off two-year fixed-rate deals later in 2024 to “no longer face an increase in mortgage rates” when refinancing.

But rates remain above the levels they were at before the BoE began raising the cost of borrowing in late 2021.

Falling mortgage rates could take some sting out of the criticism directed towards the Conservatives’ management of the economy. Rates soared in the wake of then prime minister Liz Truss’ ill-fated “mini” Budget in September 2022.

Labour, which has a strong polling lead over the Tories, has pledged to boost housebuilding and introduce a new mortgage guarantee scheme for first-time buyers if it wins power.

Affordability remains constrained. According to Nationwide, as of the end of last year, the typical monthly mortgage payment of a first-time buyer was 38 per cent of take-home pay, compared with the long-run average of 30 per cent.

Meanwhile, homeowners reaching the end of fixed deals could still be hit with higher costs. About half of mortgage holders have yet to come off their pre-2022 fixed rates, according to property portal Zoopla.

Marc Vlessing, chief executive of Pocket Living, which develops affordable homes, said: “Any reduction in mortgage rates will be a significant relief for [would-be homeowners] and might be perceived, rightly or wrongly, as a credit to the current government.”

Additional reporting by George Steer and James Pickford in London