Mortgage Interest Rates in 2024: Trends, Forecast and Impact on Investors

Mortgage interest rates have peaked quite recently, with some lenders offering interest rates as high as 6.98% in July 2023. They have since dropped slightly, but what will happen to mortgage interest rates for the rest of 2024 and into 2025? Join me, Liam J Ryan, as I take a look at UK mortgage interest rate trends for 2024 and 2025.

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How Are Mortgage Interest Rates Determined?

The Bank Rate, also known as the Base Rate, is set by the Bank of England’s Monetary Policy Committee to control inflation levels and maintain a stable economy. Since February 1st, the Bank of England has kept the Bank Rate at 5.25%. This is quite high in comparison to recent years – after the economic crash of 2008 and the reduced economic activity in 2020 due to the pandemic, the Bank Rate dropped to 0.5% and 0.1% respectively in an attempt to bolster the UK economy. The chart below from the Bank of England shows the interest rates on various fixed-rate mortgages as well as the Bank Rate.

Mortgage rates are closely tied to the Bank Rate, although they are also affected by the swap rate, which is what mortgage lenders pay to larger financial institutions to obtain cash for mortgages. Ideally, swap rates will be lower than mortgage interest rates, enabling banks to make a profit on mortgages, so the swap rate can affect mortgage rates offered to customers by banks. The swap rate is affected by inflation, GDP growth, and other variables, so it is always subject to change.

The chart below from CBRE shows how closely linked the Bank of England Bank Rate, the swap rate, and mortgage rates really are.

In short, mortgage rates depend on a variety of factors, so it is prudent for homebuyers and property investors to keep a close eye on UK mortgage interest rates.

When will the Bank Rate change?

The next review of the Bank Rate is planned for 20th June 2024.

Current UK Mortgage Rate Trends of 2024

Since the peak in the summer of 2023, mortgage interest rates have fallen just slightly, with an 85% LTV 2-year fixed rate mortgage coming down from 6.35% in August 2023 to 5.03% in January 2024. This is due to a drop in the swap rate, as the interest rate has remained the same. The swap rate and the mortgage interest rate are linked, so any fluctuations in the swap rate can be expected to affect mortgage rates too.

What does LTV mean?

LTV means ‘loan to value’ and is a ratio that determines the interest rate on a particular mortgage. A lower LTV means that you can get a lower mortgage interest rate. Here is a formula that you can use to calculate your LTV for a property:

LTV ratio = mortgage amount/property value

For example, if you want to purchase a property that has been valued at £200,000, and have a deposit of £20,000, then you would need a loan of £180,000 to purchase the property. This gives you an LTV of 90%. Mortgage lenders would see this as risky, as they would need to lend you 90% of the property’s value. LTVs of 80% or less will grant you a much more favourable mortgage interest rate. Note: as you pay off the mortgage, the LTV will drop as your equity in the property increases, and you could remortgage at a lower interest rate.

Impact on Homebuyers and Investors

Home buyers and property investors would benefit from lower mortgage interest rates. Having to pay less interest to your mortgage lender would put you in a much better financial position. The current reduction in mortgage interest rates, however modest, is a good sign for homebuyers and property investors.

Factors Influencing Mortgage Rates

There are several factors that influence mortgage rates, including the aforementioned Bank Rate and swap rate, as well as the influences on these rates such as the GDP of the UK, inflation, employment rates, the strength of the UK pound as compared to other currencies, and several other variables. The mortgage interest rate is not just tied to one influence – this is why it is important for homebuyers and property investors to frequently check on current mortgage rates and expert predictions for the next few months.

Mortgage Rate Forecast for 2024

According to Forbes, the governor of the Bank of England, Andrew Bailey, says he does not expect the current Bank Rate to change anytime soon, as the current rate of inflation of 3.2% still has further to fall to bring it in line with current government targets of 2%. There has been a slight reduction in mortgage interest rates in the first quarter of 2024, and this trend, however modest, looks set to continue. This article from the BBC indicates that several lenders including HSBC, Barclays and TSB are offering a reduced mortgage interest rate on new fixed mortgages from Friday 17th May, although no figures have been provided at the time of writing.

The US-owned credit rating agency S&P Global Ratings has expressed doubt that the Bank of England will reduce the Bank Rate until the second half of 2024, and chief UK economist at Capital Economics Paul Dales agrees.

CBRE predicts that UK mortgage interest rates will fall to 3.82% on a 75% LTV 5-year fixed mortgage, possibly boosting housing market activity. However, they also mention that rising house prices may wipe out any potential for savings on property investment. The chart below shows their predictions for mortgage rates and house prices for 2024 and beyond:

Should I Remortgage in 2024?

Mortgage rates in 2024 continue to be fairly high despite recent reductions, so if current predictions are correct, it may be worth waiting to remortgage until 2025 if possible.

Mortgage Rate Forecast for 2025

As indicated by the chart above, CBRE predicts that mortgage interest rates will see further reductions in 2025, and further into the future. According to The Times, most analysts think that interest rates will fall and that the Bank of England will lower the Bank Rate to 4% by the end of 2025, meaning that mortgage interest rates will also be reduced. Forbes also offers predictions from many expert sources that the Bank Rate will be cut further in 2025 and mortgage rates will be reduced.

Overall, it looks like UK mortgage interest rates will see a modest reduction for the rest of 2024 with further potential reductions coming in 2025. It is important to remember that many factors affect interest rates, so I would advise you to keep updated on economic news, check interest rates frequently, and seek expert advice when applying for a mortgage.

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