Are mortgage rates about to fall?

This month, there was some good news on the mortgage front as the Bank of England held its base rate for the first time in almost a year and a half. The mortgage market has been in turmoil since the mini-budget last year. As a result of high interest rates, home sales fell by 16% in August compared with the same month the previous year. It was the weakest August for house sales since 2020 when the market was dealing with the impact of the COVID-19 pandemic.

Higher interest rates have also impacted the affordability of first-time buyers as the number of first-time buyers taking their first step onto the property ladder fell by a fifth. Halifax estimates that about 186,000 first-time buyers will get onto the property ladder this year, about 22% fewer than last year. Data from Nationwide showed that house prices fell by 5% because of high mortgage interest rates, making mortgage interest payments more expensive.

What has been the impact of interest rates rising?

Around 700,000 households are coming up to remortgage in the next six months, most of whom are on rates at or below 2.5%, as most would have remortgaged when interest rates were at a record low during the pandemic. But there is some good news after the Bank of England’s decision to hold interest rates has resulted in the average five-year fix dropping below 6% for the first time in nearly three months, even though the base rate has increased.

The average five-year fixed-rate mortgage fell to 5.99%, according to Moneyfacts. Nationwide estimates that someone earning an average income and purchasing a typical first-time buyer home with a 20% deposit is now spending 38% of their take-home pay on their monthly mortgage payment. The long-term average is 29%, and 2020 it was 27%.  

When will interest rates fall?

Although forecasters have started to trim their forecasts in recent weeks following inflation data and the decision by the Bank of England to hold interest rates, there are a growing number of five-year mortgage deals on the market which are now below 5% because of SWAP rates falling, allowing banks to pass this onto the customers. Most below 5% deals are currently aimed at borrowers with bigger deposits. However, many mortgage brokers say that a full-scale mortgage price war is underway as lenders jostle to attract customers, with more mortgage rate cuts expected in the following weeks and months. 

Where will interest rates settle in the future?

Mortgage rates rose rapidly between mid-May and July, with the average rate reaching a peak of 6.86%, due to inflation data suggesting that the Bank would have to raise rates further and keep them high for longer. Better-than-expected inflation data over the past few months has led to a fall in swap rates, which reflect market expectations of the future Bank rate and are used to price fixed-rate mortgage deals. The two-year swap rate is 5.06%, down from 5.46% last month. Markets no longer expect the Bank to increase base rate further.

The rates will plateau over the next few weeks after banks re-price mortgages in line with the current market expectations to attract new customers. The best rates until the spring of next year will start with a 4 in front of them until the spring of next year when markets expect rates to start falling. Expect the long-term average after the spring of next year to settle between 3.75% and 4.25%.