Mortgage Rates And House Price Forecast – Forbes Advisor UK

With a new government in post, inflation at its target 2%, and the Bank of England seemingly on the brink of cutting interest rates, the outlook for mortgage borrowers is the most promising it has been in a few years.

For now, however, despite some reductions in fixed mortgage rates since June, two and five-year fixed rates remain at a much higher level than they have been in recent history. 

The Bank of England has kept its benchmark Bank Rate at 5.25% since August last year, when it reached a 16-year high. This has meant much higher borrowing rates for first-time buyers and those remortgaging away from low fixed rates.

Financial markets and consumers are hoping interest rates will start to fall quickly in the second half of this year, if all the financial indicators, such as inflation and jobs data move in the right direction, as is expected.

But what does this mean for mortgage rates? And how soon will the effects be seen in the housing market, which is suffering due to cash-strapped buyers and a lack of supply of homes for sale? 

What will happen to the Bank Rate in 2024?

There is widespread consensus that the Bank of England will cut interest rates by a quarter percentage point (0.25%) in September, taking it to 5%.

Some experts believe there is a chance the Bank’s Monetary Policy Committee could vote to cut rates as soon as its next meeting is on 1 August. That said, Jonathan Haskel, a member of the none-strong committee, has recently said he would rather hold rates at 5.25% until there is more certainty that inflation has “subsided sustainably”.

Either way, it now looks probable Bank Rate will be at or below 5% by the Autumn.

Paul Dales at consultancy Capital Economics, says: “Most investors think that interest rates will be first cut from 5.25% in September and will be lowered to around 4.00% by the end of 2025. But we think rates will be reduced in August and will be lowered to 3.00% by the end of next year (2025). That’s because we think inflation will fall a bit further than expected and will spend most of the next two years below the 2% target.”

And Robert Gardner, chief economist at Nationwide building society, also believes there is a high chance rates could be cut in August, but adds the caveat “if inflation numbers disappoint, this could be delayed, perhaps until November”.

Gardner feels there is still a fair amount of uncertainty about the path for Bank Rate: “While headline inflation fell back to the 2% target in May, this was largely due to favourable global trends – domestic price pressures are still elevated. 

“Nevertheless, if there are signs that these pressures are easing in the months ahead, policymakers will probably feel comfortable enough to lower interest rates modestly – perhaps by around 50 percentage points (to 4.75%) by the end of this year, as this would still leave monetary policy in restrictive territory. 

“However, the pace and extent of any interest rate reductions will continue to be determined by the tone of incoming data and how much progress is being made in cooling domestic inflation.”

Adrian Anderson, founder of London-based mortgage and financial planning firm Anderson Harris, says: “Mortgage affordability has been an issue for many potential borrowers recently due to the UK’s high interest rate. Inflation finally reduced to the Bank’s 2% target in May, and many financial analysts now expect the first base rate cut to be in August or September.

“The outlook for lower interest rates and mortgage fixed-rate pricing looks more favourable, particularly as lenders are currently financially strong and have an appetite to lend. While lenders should be competing for market share, many borrowers may wait for further rate reductions before committing to move.”

What difference will a Labour government make to interest rates?

The new government has made clear its intention to tighten fiscal policy and boost productivity and growth, as well as housebuilding. It is widely held that this will not spook the markets or reverse the current downward trajectory for interest rates.

But Dales at Capital Economics says: “Labour’s plans to raise public spending, financed in part by higher taxes, could result in a little more economic growth – a £1 rise in spending tends to boost activity by more than a £1 rise in taxes reduces it. And if that were to push up inflation, it would mean interest rates would be a little higher than otherwise.” 

Nick Mendes at broker John Charcol is hopeful that Labour’s fiscal policy will create a stable environment: “The new Chancellor’s goal is stability and growth, which will support low and stable mortgage rates. But ultimately it will come down to market confidence in the government’s fiscal policies, and whether inflation remains at or below the 2% target.

“The proposed increased housing supply from new builds will help spur the market and the knock-on effect could be more competitive mortgage pricing from lenders, potentially lowering rates faster than expectations.

“But the market’s response to Labour’s broader economic policies will play a crucial role. If the Labour government’s fiscal policies are seen as fostering economic stability, confidence in the market could remain high, supporting lower mortgage rates. Conversely, if there are concerns about inflation or economic management, this could lead to upward pressure on interest rates, affecting mortgage rates.

“That said, we do not expect to see a repeat of the volatility of recent times, with inflation at its 2% target, this Labour government is in the fortunate position of coming to power as mortgage rates are on a downward trend.”

Mortgage rate predictions 2024

David Hollingworth at broker London & Country Mortgages says: “Fixed mortgage rates fluctuate all the time as they depend to a degree on market sentiment. As the data shifts so do the markets, which can have an impact on fixed rate deals offered by lenders.

“Hopes are high that there will be a cut to the Bank of England Bank Rate. But this will return rates to where they were a couple of years ago. Rates aren’t necessarily going to quickly fall back to the ultra low fixed rates of the last decade. Nonetheless it looks like it could be good news for borrowers if rates are more stable rather than exhibiting the large ups and downs of recent years.” 

Mark Harris at mortgage broker SPF Private Clients says: “During the second half of the year, we expect mortgage rates to slowly reduce. We have already seen some of the biggest lenders reduce their mortgage pricing in expectation of a cut to Bank Rate soon, with others expected to follow suit, service levels allowing, in an effort to drum up more business.

“I’m hopeful we’ll see five-year fixed rates starting with a ‘3’ by the end of the year.”

Should I take a tracker or fixed rate mortgage in 2024?

Once Bank Rate starts to fall and the outlook for rates looks clearer, tracker rate deals are likely to fall in price and look more competitive compared to the best fixed rates. At this point it may become a closer call for more borrowers between taking a tracker versus a fixed rate. 

L&C’s Hollingworth says: “We are closer to the point where borrowers may have a real choice between trackers and fixed rates. Trackers suit those that have some slack in their budget and could cope with higher rates if interest rates don’t fall as quickly as expected or they rise again. Others will always prefer to know where they stand and want the certainty of a fixed rate.

“But in this environment, with more scope for rates to fall than was the case for a long time, I’d expect trackers to make up a bigger proportion of mortgages than the minority share they’ve had in recent years. That may take a little while to gain traction and so I expect that will only start if we see continued lowering of the Bank Rate in 2025.” 

Harris at SPF Private Clients says: “Trackers appeal to those looking for flexibility, enabling borrowers to drop into a fixed rate without penalty when they feel the time is right to do so. That said, those on a tight budget should still consider fixing now as that will give them peace of mind and protect them from any upsets, which they can ill-afford.

“For those not sure whether to fix for two or five years, a two-year fix looks the right call for the above reasons but for those who can’t afford to be wrong, a five-year fix or even longer is worth considering. There are also some flexible deals worth taking a look at such as Virgin’s five-year fix which only has two years of early repayment charges – this gives the borrower the affordability and security benefits of the longer term but also the flexibility to exit into a (

Hopefully better rate with no penalties after two years.”

But Mendes at John Charcol is more sceptical about tracker deals at their current levels: Those coming to remortgage over the next year should generally avoid tracker rates unless they specifically need a product with no early repayment charges (ERC) and they can bag a tracker with flexibility. 

“Fixed rates already anticipate rate cuts, making them likely to offer better value for at least another year. In addition to potentially lower costs, fixed-rate mortgages provide the added benefit of predictable monthly payments, which can significantly aid in budgeting and financial planning. 

“Therefore, for most homeowners, opting for a fixed-rate mortgage will be the more advantageous choice in the current economic climate.”

What will happen to mortgage rates in 2025?

Most experts predict there will be a slow and steady reduction to rates over the next couple of years, rather than swift or large cuts to the Bank Rate by the Bank of England.

Many economists believe the Bank Rate will settle somewhere around the 3.25% to 3.5% mark in the next couple of years, which would point to fixed mortgage rates of between 3% and 4%, depending on the term of the deal and the deposit or equity in the home.

Hollingworth at L&C says: “The current expectation would be that interest rates – and mortgage rates – should continue to ease back rather than be cut hard and fast. That will, of course, be influenced by external data, and the MPC will want to be sure it can keep control of inflation. 

“But as the rate outlook improves this should be good news for borrowers coming out of fixed rates, as their mortgage options in 2025 may look a little more competitive than the current rates.”

Hollingworth adds that he is seeing more borrowers opting to fix for a shorter two-year timeframe, in the hope they can review their deal sooner and take advantage of lower rates in 2026: “There’s no guarantee of that, plus short-term rates are currently higher than the medium and long-term fixes. But a short-term fix offers that flexibility.”

Riz Malik, founder of broker R3 Mortgages, says: “While we anticipate better market conditions as we move into 2025 both here and in the United States, the era of near-zero interest rates is over. Nevertheless, it’s important to remain cautious, as any unexpected shock could set us back. We are not entirely out of the woods yet.”

House price predictions 2024 and 2025

House prices have been largely flat over the past 12 months (annual property price rises range from 1.1% to 1.6%) according to the latest data from Halifax, Nationwide and the Office for National Statistics, for example.

High mortgage rates have acted to dampen demand, with the market seeing a fall in activity and properties taking longer to sell.

But what could happen to house prices in the next half of 2024 and into next year? Here’s our run down of what the property experts are predicting for 2024:

Nationwide building society

Gardner at Nationwide says: “With economic growth expected to be modest and borrowing costs likely to remain well above the lows seen in the wake of the pandemic, it will take time for the affordability constraints that have been acting as drag on the housing market to ease, and house price growth is likely to remain subdued in the interim. 

“These constraints are expected to ease gradually in the years ahead as income growth outpaces house price growth, and as mortgage rates edge lower. We expect house prices to be broadly flat this year before slowly gathering momentum into next year.”

Zoopla

Richard Donnell, executive director of research for the online property portal Zoopla, says: “Homebuyers have returned to the housing market and we are on track for 10% more sales than last year. The first cut to the Bank Rate will give a sentiment boost to the housing market and this will support sales over the second half of 2024. House price growth will remain muted and prices are expected to be 1.5% higher over 2024.

“House price growth will remain muted over the next two to three years. House prices need to under-perform income growth to help reset affordability across southern England. There is room for prices to rise in line with incomes across the rest of the UK.”

Halifax

Amanda Brydon, head of mortgages at Halifax, says: “House prices were relatively flat for the third successive month in June (2024) reflecting a market that remains subdued, though overall activity has been recovering. For now it’s the shortage of available properties, rather than demand from buyers, that continues to underpin higher prices.

“Mortgage affordability is still the biggest challenge facing both homebuyers and those coming to the end of fixed-term deals. This issue is likely to be eased gradually, through a combination of lower interest rates, rising incomes, and more restrained growth in house prices.

“While in the short-term the housing market is delicately balanced and sensitive to the pace of change to Bank Rate, based on our current expectations property prices are likely to rise modestly through the rest of this year and into 2025.”

Anderson Harris

Adrian Anderson, founder of Anderson Harris, says: “A shortage of stock and high demand for properties has kept UK property prices higher than analysts first predicted. Some buyers may now have greater confidence from Labour’s election victory and Chancellor Rachel Reeves’ pledge to bolster the UK economy and boost growth.

“There is often a correlation between lower interest rates, mortgage affordability and property prices. Looking ahead, this means there is cautious optimism for both property values and a higher level of property transactions in the remainder of 2024.”

How to get a lower mortgage rate

Even if interest rates don’t fall quite as quickly as borrowers would wish, there are still steps you can take to find the best deal for your needs, and keep a lid on monthly costs.

Action you can take includes:

• use a mortgage broker: Using a fee-free mortgage broker (such as our partner Better.co.uk) who can scour the market to find the most suitable deals for your needs 
• start looking early: If your current mortgage deal is coming to an end in 2024 you can speak to a broker and start looking for a new deal up to six months ahead of the end of your existing deal. You could lock in a competitive fixed rate now, for example, but if rates did fall during that time you could still switch to the best rates at the time
• boost your credit score: Take steps to strengthen your credit score to ensure you’re offered the best possible mortgage rates
• increase savings: By accumulating a larger deposit towards a home purchase you may be able to get a lower mortgage rate
• consider different mortgage terms: A five-year fixed rate could have a lower interest rate than a two-year deal, for example. But look out for the arrangement fees as these can bump up the total cost of a deal
• speak to your current lender. It is worth comparing product transfer deals (the rate and fees) with the prevailing deals in the open market to see if you might save money by sticking with your existing lender. 

What affects mortgage rates?

A complex set of factors impact mortgage rates, including broader economic conditions, the monetary actions of the Bank of England and inflation. Fixed mortgage rates are also directly impacted by swap rates. These are the interbank interest rates at which the banks lend to each other.

The rate you’re offered on a mortgage will also depend on the lender you opt to borrow from and your credit score and financial position. 

Demand for mortgages can also affect rates, pushing them higher as available capital for lending tightens. Conversely, when there’s less borrower demand, as we have seen in recent months due to high fixed rates, lenders will sometimes offer more competitive rates or other incentives to attract borrowers and increase business.

How to find the best mortgage rate

Getting a great mortgage rate can save you a significant amount of money over time. Here are some tips that can help you get the best rate possible for your situation:

• keep your eye on rates and act early. Mortgage rates are constantly changing. Keeping a close watch will make it easier to find and lock in a better rate ahead of time. As mentioned above typically lenders will allow you to lock in a new mortgage deal up to six months before your existing rate comes to an end
• check your credit score. When you apply for a mortgage, the lender will review your credit to determine your creditworthiness. In general, the higher your credit score the better your rate will be
• compare lenders. Consider options from as many lenders as possible and use a mortgage broker to find the best deal for you. 

Mortgage rate predictions for the next five years

Predicting mortgage rates for the next five years is a tall order, especially considering the uncertainty seen over the past two years with record high inflation, stagnant growth in the economy and huge cost of living pressures for households.

But as far as which direction interest rates will go in the years ahead, most experts concur there will be a gradual fall, starting in the coming months. However, the timeline for this downward trend remains uncertain.

John Charcol’s Mendes says: “While no one can confidently pre-empt market conditions in a year, two years or even five-years’ time, markets are forecasting future Bank Rate reductions. It means mortgage holders are likely to become more accustomed to seeing fixed rates starting at sub-4% in the long term, which would be welcome.”