As the prospect of the nation going into recession looms ever closer and the UK faces its highest rate of inflation since the 1980s1, it seems as if there’s no end in sight to the instability and uncertainty surrounding mortgages and the UK housing market. But the real question on many of our minds at the moment is: when can homeowners expect a fall in mortgage rates?

What’s the latest in the mortgage market?

Following Rishi Sunak’s instatement as prime minister, the proposed tax cuts announced in Liz Truss and Kwasi Kwarteng’s mini-budget have now been reversed and/or axed. However, as of 3rd November 2022, the base rate has increased by a further 0.75% in a bid to control inflation. Now standing at 3%, this latest increase is the largest base rate hike since October 1989.2

By raising the base rate, the cost of borrowing has once again increased, with the aim of reducing demand from consumers and slowing down the economy. Despite the more positive intentions behind this latest base rate increase, it hasn’t done much to settle what is an already turbulent market. This poses an additional worry for the 1.8m homeowners3 whose fixed rate term is due to end next year, which potentially means that customers will be paying hundreds more on their new mortgage deal than they were previously.

According to Brian Murphy, Head of Lending at Mortgage Advice Bureau, things will continue to worsen before they get better. “Expectations are that the industry will continue to see an upwards trend of defaults on mortgage payments in the coming months,” said Brian. “It’s recommended that anyone fearing that they may struggle with mortgage payments go straight to their provider for guidance.”

It’s not all doom and gloom…

While the initial response to the mini-budget was an immediate reduction in the number of mortgage products, these are slowly showing signs of returning. Average rates are falling marginally, while tracker rates are becoming more readily available, as well as discounted variable rates.4 In some cases, lenders have cut rates by 0.5%, with many products now falling below the 6% threshold.5

The increase in interest rates is ideal for savings accounts, as it encourages them to spend less and save more. Average savings rates for one year fixed rate bonds are at 10-year highs, according to Moneyfacts.6 This is great news for savers, with 49% of consumers in a survey held by Yapily admitting to saving 5% or less of their salary each month.1

In addition, while the vast majority of policies in the mini-budget have now been axed, cuts to stamp duty were not, meaning homeowners could save up to £6,250 on their home purchase.5 This may give those looking to relocate the encouragement they need to move, which is great news given current consumer sentiment around spending. In fact, 95% of consumers admit that the cost of living crisis is a real worry1, with 9 out of 10 having used money saving and management tools in the last year1.

The pound is beginning to show signs of stabilising, with gilt yields and the price of natural gas also stabilising, all of which should contribute to the market settling.6 This has also had a knock-on effect on swap rates, which serves as a leading indicator for mortgage rates.6 All of this will begin to boost buyer demand levels, stabilising house prices and investment into the housing market.

Light at the end of the tunnel?

Despite the latest increase in the base rate, it does seem as if we’re at the cusp of a turning point in terms of the state of the mortgage market. Although the average fixed rate mortgage now stands at around 5-5.6%4, the latest base rate hike means lenders have actually cut their rates for the first time compared to the other base rate increases. This indicates that lenders had already factored in the latest base rate rise and any future increases, and it looks like rates should settle around the 4-5% margin by next year.7

In terms of the housing market itself, according to Zoopla, higher mortgage rates could reduce residential property prices by up to 5%.8 Buyer demand is much lower than usual, with the number of houses for sale below average.9 On the whole, the housing market in 2023 mainly looks set to be one of re-adjustment as the UK returns to more consistent mortgage rate levels.10 In the longer term, Savills expects house prices to grow by 1% in 2024, followed by a larger increase of 7% in 2026 if mortgage lenders cut rates over the next 12 months and the base rate declines from mid-2024 as inflation falls.11

So how does this leave current, new and prospective homeowners for the time being? “In this enduring period of rising interest rates and inflation, homeowners should prioritise future-proofing their mortgage and property ownership plans,” adds Brian. “Advisers have now helped clients through eight months of consecutive rate rises, and though the situation is far from ideal, at least it puts them in the best possible position to offer advice to clients that will stand the test of time.”

We’re here to help

While returning to the lower mortgage rates of recent years seems unlikely, it’s hoped that the reversal of the majority of the mini-budget measures will slowly increase consumer confidence within the housing market. In the meantime, if your mortgage term is about to renew and you’re worried about what to do next, or you’re a first time buyer unsure about your options, speak to an adviser.

On hand to support you every step of the way, our mortgage advisers will provide you with clear-cut guidance to help you navigate the rapidly changing market. Whether you’re a first time buyer or due to remortgage soon, get in touch and see how we can help.

1 Yapily, 2022
2 This Is Money, 2022
3 Daily Mail, 2022
4 FT Adviser, 2022
5 The Sun, 2022
6 Moneyfacts, 2022
7 Property Industry Eye, 2022
8 Zoopla, 2022
9, 2022
10 Zoopla, 2022
11 Ideal Home, 2022

Important information

Your home may be repossessed if you do not keep up repayments on your mortgage.

There may be a fee for mortgage advice. The actual amount you pay will depend on your circumstances. The fee is up to 1% but a typical fee is 0.3% of the amount borrowed.