What next for mortgage rates?

Mortgage rates are heading higher once again, with big lenders now reversing some of the cuts made in recent months.

Recenty, Santander and TSB announced they were increasing the prices on some deals. This was followed by NatWest who upped fixed rate prices by up to 0.3 percentage points. 

Between the start of July and the end of last week, the lowest five-year fixed rate mortgage fell from 4.28 per cent to 3.68 per cent.

Meanwhile, the lowest two-year fix fell from 4.68 per cent to 3.84 per cent during that time.

But now there are early signs of rates creeping higher again with a number of sub-4 per cent rates disappearing.

In August, the Bank of England opted to cut the base rate for the first time in over four years. 

Although on 19 September, the Bank of England held base rate at 5 per cent, the central bank is expected to cut again next month after a lower than expected inflation figures came in below 2 per cent.

However, while interest rates may be on a downward trajectory, the future of mortgage rates is a little less clear.

> Best mortgage rates calculator: Check the deals you could apply for 

What’s happened to mortgage rates? 

Last year, a succession of base rate hikes and disappointing inflation figures saw average two-year fixed mortgage rates reach a high of 6.86 per cent in the summer, according to Moneyfacts, while five-year fixed rates hit 6.35 per cent. 

But with the rate of inflation falling back and the Bank of England holding base rate at 5.25 per cent from August 2023, mortgage lenders began cutting rates.

This rate cutting continued into 2024. In January alone, more than 50 mortgage lenders cut their residential rates – some more than once. 

Mortgage rates then crept up from February until June, before falling back again in recent months.

Mortgage rates still remain far higher than borrowers had enjoyed prior to the surge in 2022.

Less than three years years ago, the averages were hovering around 2.5 per cent for a five-year fix and 2.25 per cent for a two-year. 

In fact, only as far back as October 2021, the lowest mortgage rates were under 1 per cent.

Now, the average rates are hovering just above 5 per cent and the lowest rates are just below 4 per cent. 

This is Money’s best mortgage rates calculator can show you the deals you could apply for and what they would cost. 

You can also work out how a different interest rate would change your monthly payments, taking into account any fees, using our true cost mortgage calculator. 

What next for mortgage rates? 

Mortgage borrowers on fixed term deals should worry less about where the base rate is today, and more about where markets think it will go in the future. 

This is because banks tend to pre-empt base rate movements. Lenders change their fixed mortgage rates on the back of predictions about how high the base rate will ultimately go, and how long inflation will last for.

Last year, forecasts for where the base rate would eventually peak fell from a high of 6.5 per cent to 5.25 per cent and then focus turned towards when base rate would be cut.

At the start of this year, markets were pricing in six or seven base rate cuts in 2024 with investors betting on rates falling to 3.75 per cent or 3.5 per cent by Christmas.

They have since rolled back on this following stubborn inflation readings that came in slightly higher than markets had predicted.

Investors are now forecasting that there will only be one or two more interest rate cuts this year following the Bank of England decision to cut rates in August.

Market expectations are reflected in swap rates. These are agreements in which two counterparties, for example banks, agree to exchange a stream of future fixed interest payments for a stream of future variable payments, based on a set amount.

Mortgage lenders enter into these agreements to shield themselves against the interest rate risk involved with lending fixed rate mortgages.

Put more simply, swap rates show what financial institutions think the future holds concerning interest rates.

As of 14 October five-year swaps were at 3.8 per cent and two-year swaps were at 4.02 per cent – both trending well below the current base rate. 

This is higher than a month ago when five-year swaps were at 3.39 per cent and two-year swaps were at 3.73 per cent. 

However, this is a lot lower than it was during the summer of 2023 when five-year swaps were above 5 per cent and two-year swaps were coming in at around 6 per cent.

You can check best buy tables and the best mortgage rates for your circumstances with our mortgage finder powered by London & Country – and figure out what you’ll actually be paying by using our new and improved mortgage calculator.

Why did mortgage rates rise? 

Mortgage rates first began to increase towards the end of 2021, when inflation began to rise resulting in the Bank of England increasing base rate to try and combat it. 

However, rates accelerated after the mini-Budget in late September. The pound tumbled after the then-Chancellor, Kwasi Kwarteng, announced a wave of unfunded tax cuts that unsettled bond markets.

After former Prime Minister, Liz Truss, resigned in October and new Chancellor Jeremy Hunt reversed nearly all of the mini-Budget announcements. The markets calmed down and the cost of borrowing then fell with mortgage rates slowly dropping too. 

But following a fresh round of stubbornly high inflation figures in 2023, markets began betting the base rate would peak at 6.5 per cent by the end of the year. 

This led to mortgage lenders beginning to whack their rates up again. 

However, when June’s inflation figures came in lower than market expectations, market forecasts as to where the base rate would peak began to fall.

And after a string of further positive readings on the inflation front, markets settled on a base rate peak of 5.25 per cent and began forecasting cuts in 2024.

But while inflation returned to the Bank of England target of 2 per cent in May, it edged higher over the summer months. Inflation has also be more stubborn than expected in the US.

This caused the Bank of England to hold base rate at 5.25 per cent for almost a year until it eventually cut it at the start of August.

The most recent reading from the ONS showed inflation at 1.7 per cent in September.

Most economists and personal finance experts think the Bank of England will proceed cautiously but agree the door is open for two more rate cuts this year.

Ed Monk, associate director at Fidelity International said: ‘The dip in inflation suggests a November cut to interest rates is likely, with the question now whether borrowers can look forward to another one after that before the year is out.

‘Ahead of the inflation numbers this morning the bond market was pricing in three to four quarter-point cuts before the end of next year, but that timetable may accelerate if inflation continues to undershoot the Bank of England’s forecast, which is for inflation to tick higher again this year before falling back to target next year.’

What will happen to house prices? 

House prices rose for the third month in a row in September, according to the latest figures from Halifax, bringing the average home within £108 of the 2022 peak.

Property values surged 4.7 per cent annually, according to the mortgage lender, marking the biggest rise since November 2022.

While the typical home price has risen by around £13,000 over the past year, this increase is largely a recovery of the ground lost over the previous 12 months.

The typical home now costs £293,399, which is the highest recorded since June 2022, when prices peaked at £293,507.

Amanda Bryden, head of mortgages, Halifax, says prices have been helped by improved market conditions over the summer and into early autumn.

‘Mortgage affordability has been easing thanks to strong wage growth and falling interest rates,’ said Bryden.

‘This has boosted confidence among potential buyers, with the number of mortgages agreed up over 40 per cent in the last year and now at their highest level since July 2022.

She adds: ‘While improved mortgage affordability should continue to support buyer activity – boosted by anticipated further cuts to interest rates – housing costs remain a challenge for many.

‘As a result we expect property price growth over the rest of this year and into next to remain modest.’

What next for interest rates?

For almost two years, the Bank of England attempted to combat rising inflation by continually upping the base rate.

Now the central bank is keeping a keen eye on disinflationary factors, such as any uptick in unemployment and stalling economic growth.

At present, markets are pricing in one or two further rate cuts in 2024. If forecasts are correct, this could mean base rate will fall to 4.75 or 4.5 per cent by the end of 2024.

Looking further ahead, financial markets are forecasting base rate will fall to around 4 per cent by the end of next year before eventually settling at around 3.5 per cent.

Some economists are slightly more bullish. For example, Capital Economics is predicting base rate will fall to 4.5 per cent this year and then to 3 per cent by the end of next year. 

It is not alone either in this view, with Goldman Sachs analysts reiterating this rate forecast recently.

Paul Dales cheif economist at Capital Economics said: ‘Overall, a 25bps cut in interest rates from 5 to 4.75 per cent at November’s policy meeting already seem nailed on before today’s release. 

‘The chances of that being immediately followed by another 25bps cut at the following meeting in December has just gone up. 

‘At the moment, though, we think the Bank will keep rates on hold at the meeting. 

But we still think rates will eventually fall to 3 per cent, which is lower than the 3.5-3.75 per cent priced into the market.’

What mortgage deal should you choose? 

Those buying a home or remortgaging now have a tough call to make when deciding how long to fix their mortgage rate for.

Last year, most borrowers opted to fix for two years. They believed that interest rates would begin falling during that time, and a shorter fix would allow them to switch to a cheaper rate more quickly. 

There were also some borrowers going for tracker mortgages that typically come without early repayment charges and track the base rate. 

However, confidence that rates would start falling drastically appears to be dissipating, meaning that increasing numbers are now choosing to lock in their rate for five years, according to mortgage broker L&C. 

David Hollingworth, associate director at L&C Mortgages says the split between those fixing for two and five years is roughly 50:50. 

‘The fact that interest rates are still predicted to fall over time continues to see a division in the product take up between those opting to lock in for a couple of years over a longer time frame,’ he says. 

‘We have seen a slight shift back from two-year fix to a more even split in the proportion opting to fix for two or five years.

‘As the market has stabilised the attraction of the lower five-year rates may be attracting more interest, especially as no one knows how low rates may drop to in reality.’

Although mortgage rates are higher than many people are used to, it may still pay to switch, especially if they are on your lenders’ standard variable rate. 

And for those coming to the end of a fixed term, switching to another fixed term could be cheaper than sticking with their existing one. 

Choosing what length to fix for depends on what they think will happen to interest rates during that time, and what their personal circumstances are – for example if they will need to move home in two, three or five years. 

Those opting for a two-year fix are essentially hedging their bets on interest rates falling over the next couple of years. 

They’ll be banking on the expectation that further interest rate cuts are to come.

Fixed rates of any length also offer borrowers certainty over what their payments will be from month-to-month.

If rates continue to fall, a tracker mortgage without an early repayment charge could put borrowers in a position to take advantage.

However, for all the potential benefit, a tracker product will also leave people vulnerable to further base rate hikes in the meantime while also being more expensive than fixed rates at present.

Whatever the right type of mortgage for your circumstances, shopping around and speaking to a good mortgage broker is a wise move.

For a full rate check use This is Money’s mortgage finder service and best buy tables. These are supplied by our independent broker partner London & Country.  

Best fixed-rate mortgage deals 

Bigger deposit mortgages

Five-year fixed rate mortgages 

Santander has a five-year fixed rate at 3.75 per cent with a £999 fee at 60 per cent loan to value.

Barclays has a five-year fixed rate at 3.76 per cent with £899 fees at 60 per cent loan to value.

Two-year fixed rate mortgages 

Barclays has a 3.9 per cent fixed rate deal with a £899 fee at 60 per cent loan-to-value. 

Santander has a two-year fixed rate at 3.92 per cent with a £999 fee at 60 per cent loan to value.

Mid-range deposit mortgages

Five-year fixed rate mortgages 

Barclays has a five-year fixed rate at 3.85 per cent with a £899 fee at 75 per cent loan to value.

Halifax has a five-year fixed rate at 3.87 per cent with a £1,099 fee at 75 per cent loan to value. 

Two-year fixed rate mortgages       

Santander has a two-year fixed rate at 4.04 per cent with a £999 fee at 75 per cent loan-to-value. 

Barclays has a two-year fixed rate at 4.1 per cent with a £899 fee at 75 per cent loan to value. 

Low-deposit mortgages

Five-year fixed rate mortgages 

Barclays has a five-year fixed rate at 4.39 per cent with a £999 fees at 90 per cent loan to value.

Virgin Money has a five-year fixed rate at 4.43 per cent with £995 fees at 90 per cent loan to value. 

Two-year fixed rate mortgages 

Virgin Money has a two-year fixed rate at 4.85 per cent with a £995 fee at 90 per cent loan to value. 

Coventry Building Society has a two-year fixed rate at 4.9 per cent with a £999 fee at 90 per cent loan to value. 

 >> Check our our mortgage tracker to compare the latest available deals  

Tracker and discount rate mortgages 

The big advantage to a tracker mortgage is flexibility. The downside is they are currently more expensive, so it will take a few more interest rate cuts before borrowers starting beating the fixed rate deals.

The can sometimes be the case with discount rate mortgages, which track a certain level below the lenders’ standard variable rate.  

A fixed-rate mortgage will almost inevitably carry early repayment charges, meaning you will be limited as to how much you can overpay, or face potentially thousands of pounds in fees if you opt to leave before the initial deal period is up.

You should be able to take a fixed mortgage with you if you move, as most are portable, but there is no guarantee your new property will be eligible or you may even have a gap between ownership.

Many tracker deals have no early repayment charges, which means you can up sticks whenever you want – and that suits some people.

Make sure you stress test yourself against a sharper rise in base rate than is forecast. 

Can you get a mortgage?  

Getting a mortgage is tougher than it once was. You will need to get your finances in order and be prepared for the lengthier application process and in-depth affordability interviews getting a mortgage requires nowadays.

Lenders also apply different standards to what they will lend.

Weigh up the above, check the rates here and in our best buy mortgage tables, have a scout around what the best deals look like – and speak to a good independent broker.

There are a couple of things to look out for if you do decide to fix.

You need to check the bumper arrangement fees are worth paying – if you don’t have a big mortgage you may be better off with a slightly higher rate and lower fee.

It’s also wise to think carefully about whether you expect to move home soon. A good five-year fix should be portable, so you can take it with you.

But your new property will need to be assessed and you might need to borrow extra money, and so your lender could still say no. Getting out of a fixed rate typically requires a hefty hit to the pocket from early repayment charges.