Amid predictions that the Bank of England could pull interest rates down to 2.75% next year, borrowers are hoping their upcoming announcement next week will bring an early Christmas present.
Mortgage rates have continued to fall over recent months, after creeping upwards again during the middle of the year due to market uncertainty. And there could be more optimism on the way as the year draws to a close, with the Monetary Policy Committee (MPC) due to meet next week to decide on UK interest rates.
Some economists are predicting a double-whammy of interest rate cuts before the end of the year, after inflation rates fell to below the Bank of England’s 2% target, to 1.7%, in September. This could mean interest rates are brought down in both November and December, to reflect the improving direction of inflation.
Yet alongside this, mortgage rates have trod their own path, influenced by more than just UK interest rates, with cheaper mortgage deals now available. The hope is that as interest rates begin to come down further, lenders will be able to compete with even better products for borrowers.
Positive news on mortgage rates
According to Rightmove’s latest Mortgage Tracker, the average five-year mortgage rate is now 4.64%, which is down from 5.39% this time last year. For a two-year fixed, interest rates are now averaging 4.94%, compared with 5.85% last year.
For buyers with heftier deposits, of course, rates are even more competitive. The average 60% LTV 5-year fixed mortgage rate is now 4.05%, down from 4.95% a year ago.
Looking specifically at monthly costs for the “typical first-time buyer type property”, Rightmove calculates that on an average five-year fixed, 85% LTV mortgage products, based on current interest rates, now costs £1,088 per month. This is down from £1,167 a year ago.
Whether the downward trend will continue in the short term, with the new Labour government’s first big Budget announcement round the corner, remains to be seen, but the longer-term outlook is that mortgage rates will be lower next year than this year.
Toby Leek, NAEA Propertymark President, said: “It’s positive to see that the average rates on many mortgage deals have dropped since last year, evidently providing many buyers and those looking to step onto the property ladder for the first time with increased affordability.
“With the Bank of England making its announcement on the next steps for interest rates next week, a further drop will go a huge way in helping even more people access more affordable and better suited mortgage deals.
“However, we now hope that the UK government takes the opportunity in its upcoming Autumn Budget to further help buyers and continue the positive momentum within the market as it plays a crucial factor in the overall health of the wider economy.”
Will interest rates fall to 2.75%?
Earlier this week, US investment bank Goldman Sachs predicted that UK interest rates would almost halve from their current rate of 5% down to 2.75% by the end of 2025. In a more sober forecast, Santander thinks a low of 3.75% by the end of next year is more likely.
Meanwhile, earlier this year, the International Monetary Fund (IMF) recommended that interest rates should be cut to 3.5% by the end of next year, so somewhere in the middle of the two predictions.
Either way, the general consensus, based on current information and predictions, is that the rate will slowly fall to more sustainable levels. There is also general agreement that it is extremely unlikely that rates will return to the historic lows we had seen prior to the pandemic – so borrowers will need to accept a “new normal”.
After a tougher landscape over the past couple of years from property owners who rely on borrowing, any falls will be welcome news. However, on the flip side, this also means less competitive savings rates for those who prefer to store their cash in the bank rather than invest in property.
Goldman Sachs said that “slow productivity growth, falling prices of capital goods and population ageing” would hold rates down, while “sharply rising public debt and a pick-up in population growth” would keep them above the lowest values.
Keep up-to-date with the latest UK property market news and trends here.