Mortgage rate predictions for Q4 2024 & beyond

Mortgage rate predictions for Q4 2024 & beyond

Hands up, who wants cheaper mortgage borrowing? As a nation that still places great emphasis on homeownership, almost everyone wants less expensive home loans. In this article, Viewber unpicks the different ‘rates’, examines their relationship with mortgages and collects rate predictions.

Bank of England bank rate

The Bank of England (BofE) is responsible for setting the UK bank rate – also known as the base rate. This is the key rate that influences all types of lending, borrowing and saving. A high bank rate means it will be more expensive to borrow money from commercial banks and building societies, but those with cash savings will enjoy more interest paid to them. The current BofE bank rate is 5% (as of late October).

The bank rate is used to keep inflation low and stable. At the moment, the target inflation rate is 2% and the country’s current inflation figure is 1.7%. Inflation measures how much the cost of goods and services are rising by. In its crudest form, a low bank rate is designed to encourage consumers to spend and borrow more, while a high bank rate is usually set to encourage people to save and spend less.

Swap rates

The BofE bank rate influences many different types of rates but when it comes to mortgages, equal attention should be paid to something called swap rates. Banks and building societies borrow money from other financial institutions to facilitate their business operations and swap rates are what the lender will pay when borrowing money from a third party.

Swap rates can go up or down but when they are stable, they usually result in lower mortgage rates for the public. Setting swap rates relies on forecasting, so if experts think the bank rate will rise in the future, swap rates tend to rise as a result. Swap rates can also be affected by how many people invest in UK government bonds/gilts.

Mortgage rates

Mortgage rates are set individually by each lender and will not be the same as the BofE bank rate or the market’s swap rates. In fact, rates attached to 2- and 5-year fixed rate mortgages, at 75% loan to value, have consistently been higher than the BofE base rate since 2012.

While swap rates and the BofE bank rate will underpin mortgage rates, the figure charged to borrowers will also be influenced by unique factors. This could be the size of the deposit, whether the applicant is self-employed or a buy-to-let investor, the borrower’s credit rating, how long the mortgage term is and the type of property that is being bought. In short, the bigger the risk taken by the lender, in terms of whether they think the money will be repaid, the higher the mortgage rate applied.

How mortgage rates behave

Given that all three rates are interlinked, experts rely heavily on predictions and constantly read the markets for clues as to what may happen in our economy. A word of warning: forecasts are rarely accurate and it only takes one event to derail the predictions.

For example, in October 2022, Liz Truss’s mini Budget caused havoc in the mortgage market. At the start of September that year, the average two-year fixed-rate mortgage was 3.66%. By the start of October — 10 days after the budget — it had jumped to 5.24%.

Additionally, mortgage rates can change on a daily basis and a lender may also reduce their mortgage rates if they have not met lending targets, or if a price war breaks out and they’re losing business to competitors.

Will the bank rate reduce?

It’s the big question on everyone’s lips: is the bank rate going to reduce? At the time of writing, the Autumn Budget is yet to be delivered and as we witnessed with the Truss administration, the details can have seismic shocks.

The backdrop to the Autumn Budget is, however, looking positive. Inflation has fallen to below its target and the Governor of the BofE, Andrew Bailey, has said the BofE could be ‘more aggressive’ in cutting the bank rate as a result.

How much by & how quickly?

The BofE’s next bank rate decision will be announced on Thursday 7th November and it is widely expected the monetary policy committee will reduce the bank rate from 5% to 4.75%. While it was previously thought this would be the only reduction left in 2024, there is mounting hope for another 0.25% cut in December, which would see the bank rate start 2025 at 4.5%.

Current mortgage rates: a benchmark

On 2nd October 2024, the average mortgage rates according to Rightmove were:

· Average 2 year fixed mortgage rate at 60% LTV = 4.15%

· Average 5 year fixed mortgage rate at 60% LTV = 3.89%

· Average Standard variable rate (SVR) = 8.16%

Mortgage rate trajectory 2024

A lower bank rate is great news for borrowers but not everyone will immediately benefit. If you have a fixed-rate mortgage, this will remain unchanged until the fixed period is over. Those with a variable rate or tracker mortgage will see their monthly repayments decrease in line with a bank rate reduction.

For those looking at their first mortgage or hoping to remortgage, don’t expect mortgage rates to reduce straight after a cut to the bank rate. Mortgage lenders often act on speculation and frequently cut their mortgage rates ahead of a BofE announcement.

In the coming weeks, lenders will be monitoring the market to see how aspects, such as bank rate cuts, inflation, tax changes proposed in the Budget and the Renters’ Rights Bill, affect the delicate equilibrium in property sales and they will reprice accordingly.

Medium-term mortgage rate forecast

More medium-term thinking is optimistic. Capital Economics is forecasting that the BofE will cut the bank rate to 3% by the end of 2025, with Goldman Sachs even more bullish, reporting a low of 2.5%. This is great news for swap rates, which are forecast to stay stable or become even more attractive. The net result? Mortgage rates should reduce but experts say they will not return to the extraordinary lows of 2% or less any time soon.

Long-term predictions

It is virtually impossible to forecast where mortgage rates will be during and beyond 2025 but the Office for Budget Responsibility has given a broad indication. It expects average mortgage interest rates to peak at 4.2% in 2027, reflecting more borrowers coming off cheap fixed rate deals and moving onto more expensive rates. For comparison, the average 2-year, fixed mortgage rate was 6.86% in July 2023.

The Viewber team has a keen interest in mortgage rates and if you ever want to share your thoughts with us, get in touch!