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.

That’s despite the Bank of England cutting interest rates this month from 5 per cent to 4.75 per cent.

Market expecations about how quickly and low interest rates will fall in future have shifted of late – and this is having a direct impact on fixed rate mortgage pricing.

Interest rates have fallen by 0.5 basis points since August, down from a high of 5.25 per cent.

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.

We explain what’s next for mortgage rates, both in terms of this year and next. 

> 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 first holding base rate at 5.25 per cent and then cutting it twice since August this year, mortgage rates have also reduced.

That said, 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, some of 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 during the first half of the year.

Labour’s budget has also slightly spooked markets with Labour’s plan to borrow more in order to invest, dending gilt yeilds higher.

Investors are now forecasting that there will only be three or four interest rate cuts between now and the end of next year. That could see base rate fall to 4 per cent or 3.75 per cent by late 2025.

Mortgage market expectations are reflected in sonia 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 5 November five-year swaps were at 4.07 per cent and two-year swaps were at 4.27 per cent – both trending well below the current base rate. 

However, this is higher than a month ago when five-year swaps were at 3.74 per cent and two-year swaps were at 4 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.

Inflation watch: Inflation has dipped to 1.7%, its lowest level in over three years

However, once again inflation has provided stickier than expected and the Bank of England ended up holding base rate at 5.25 per cent for almost a year.

With inflation finally returning to its 2 per cent target, the Bank finally felt comfortable in cutting rates.

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 from here, although there are some that are slightly more bullish.

Laith Khalaf, head of investment analysis at AJ Bell said: ‘The market is still pricing in another rate cut either in December or February, and then another one by May 2025. 

‘There are some more bullish voices out there, including Goldman Sachs who have forecast UK base rate to fall to just 2.75% by next Autumn. 

‘The fact the decision to cut rates was almost unanimous will put some powder in this argument.’

What will happen to house prices? 

House prices have hit a new high, according to Halifax, surpassing the previous peak set in June 2022 during the pandemic property boom.

The price of the average home rose for the fourth month in a row in October, according to the bank, which bases its figures on its own mortgage applications.

The typical property edged up by 0.2 per cent over the month, while year-on-year prices rose by 3.9 per cent. 

It means the average property price has reached a record high of £293,999, surpassing the previous peak of £293,507.

New heights: According to Halifax, the average home is now worth almost £294,000

Tom Bill, head of UK residential research at property firm Knight Frank thinks higher mortgage rates could potentially drag prices lower again.

‘The interest rate landscape has become more adverse than a fortnight ago, which will increase downwards pressure on house prices in the short-term.

‘For now, anyone deciding whether to fix for two or five years must consider whether they think Labour’s revenue-raising plans will work or more rate turbulence lies ahead during this Parliament’

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 inflation, but also disinflationary factors, such as any uptick in unemployment and stalling economic growth.

Investors are currently betting on interest rates falling to 4 per cent by the end of next year. But, as is to be be expected, forecasts vary.

The most bullish forecasters on rate cuts have base rate coming down to as low as 2.75 per cent by the end of 2025, with Goldman Sachs analysts announcing this rate forecast recently.

Goldman’s prognosis would mean a quarter point interest rate cut at all nine meetings of the Bank’s Monetary Policy Committee (MPC) from November 2024 to November 2025.

At the more reserved end of the spectrum, Santander recently revealed it expects interest rates to fall to 3.75 per cent by the end of next year.

Meanwhile, economists at Capital Economics think the base rate will fall to 3.5 per cent by early 2026.

New forecast: Capital Economics (CE) has changed its interest rate forecast because it now thinks the Bank of England will cut rates more slowly as a result of the budget 

They had previously forecast that interest rates would fall to 3 per cent by the end of next year, but have concluded that rates will now fall slower as a result of the Labour’s first budget.

Paul Dales chief economist at Capital Economics said: ‘We already thought that the Bank’s inflation concerns would mean it continues to cut rates by 25basis points every quarter until mid-2025. 

‘But in the light of the Budget, we have revised up our own GDP and core inflation forecasts. 

‘And as a result, we no longer think the pace of rate cuts will quicken in the second half of 2025 and we now think rates will fall only as far as 3.5 per cent in early 2026 rather than to 3 per cent.’ 

Looking even further ahead than late 2025 and early 2026, economists vary on where they think interest rates will level off.

Santnader for example, thinks interest rates will remain between 3 per cent and 4 per cent for the foreseeable future.

Capital Economics is predicting that base rate will eventually level off at 3 per cent. 

What mortgage deal should you choose? 

The majority of mortgage borrowers are opting for two-year fixed rate deals, according to analysis by Santander.

The bank said 60 per cent of customers are choosing two-year fixes at present in the hope interest rates will be lower when they come to remortgage in two years’ time.

Less than a quarter of its customers are opting for five-year fixed rate products, even though they are currently cheaper. The remainder are mostly choosing fixes lasting three or ten years, or trackers. 

This represents a big shift, given that in recent years, Santander says its customers have tended to show a 60/40 split in favour of five-year fixes. 

Hedging their bets: Some borrowers are opting for two-year fixed rate deals in the hope that interest rates will have fallen by the time they come to refinance

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.  

Borrowers on their lenders’ standard variable rate could save a significant amount by switching to a fixed deal – even as rates rise 

Best fixed-rate mortgage deals 

We have taken a look at the best deals on the market based on a 25-year mortgage for a £290,000 property – the current UK average house price according to the ONS.

Also bear in mind that the mortgage deals below are best in terms of having the lowest rate. They may not be the cheapest deal overall when arrangement fees are also factored in.

Bigger deposit mortgages

Five-year fixed rate mortgages 

NatWest has a five-year fixed rate at 3.84 per cent with a £1,495 fee at 60 per cent loan to value.

Santander has a five-year fixed rate at 3.87 per cent with £999 fees at 60 per cent loan to value.

Two-year fixed rate mortgages 

Santander has a 3.96 per cent fixed rate deal with a £999 fee at 60 per cent loan-to-value. 

NatWest has a two-year fixed rate at 3.99 per cent with a £1,495 fee at 60 per cent loan to value.

Mid-range deposit mortgages

Five-year fixed rate mortgages 

NatWest has a five-year fixed rate at 3.89 per cent with a £1,495 fee at 75 per cent loan to value. 

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

Two-year fixed rate mortgages       

Santander has a two-year fixed rate at 4.09 per cent with a £999 fee at 75 per cent loan-to-value. 

Barclays has a two-year fixed rate at 4.12 per cent with a £899 fee at 75 per cent loan to value. 

Low-deposit mortgages

Five-year fixed rate mortgages 

Allied Irish Banks has a five-year fixed rate at 4.53 per cent with £200 fees at 90 per cent loan to value.

Furness Building Society has a five-year fixed rate at 4.54 per cent with £749 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. 

Furness Building Society has a two-year fixed rate at 4.94 per cent with £749 fees 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. 

More shock: each month roughly 125,000 borrowers face a mortgage shock as they remortgage and their low rate come to an end

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.