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Published 26 June 2024
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Mortgage Rates Predicted to Fall as Base Rate Cut Nears

With inflation returning to target, the chances of an August base rate cut and lower mortgage rates have increased. Our latest mortgage rate forecast and base rate predictions explain more.

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UK mortgage rate forecast for July 2024

Lower mortgage rates could be on the way after the return of inflation to its target boosted the chances of a summer cut in the base rate of interest.

Following the news that inflation had dropped to the Bank of England’s stated aim of 2% in May, the odds on the base rate being lowered the next time policymakers meet in August shortened.

Noises made by the Bank of England when confirming the base rate would remain unchanged at 5.25% in June have also led several commentators to suggest an August rate cut is a growing possibility. If it doesn’t happen, the consensus among many investors and experts is that a move will be made in September. 

Either way, it seems increasingly likely that a reduction is drawing nearer. The cost to lenders of funding fixed-rate mortgages has been dropping, with the swap rates lenders use to guide mortgage pricing decisions falling. Barclays, HSBC and NatWest have all lowered the cost of selected fixed-rate deals since the base rate announcement.  

The ongoing frustration if you have a tracker mortgage or a standard variable rate mortgage, on which rates only tend to move once the base rate has moved, is that the Bank has to pull the rate-cutting trigger for borrowers to benefit.  

“For those with fixed rates, the positive comments from the Bank’s Monetary Policy Committee (MPC) have encouraged swap rates to fall a little, allowing lenders to reduce some of their fixed-rate deals,” Justin Moy, managing director of independent broker EHF Mortgages, told NerdWallet UK. 

“Those with mortgages linked to the base rate will need to wait a little longer, likely to be September at the earliest. As much as the economy is starting to improve, the likely change of government will encourage the Bank to wait and see, delaying the inevitable and frustrating borrowers.”

Fixed-rate mortgages holding steady 

Many mortgage borrowers will let out a sigh of relief when meaningful reductions to mortgage rates resume. The significant cuts made to fixed-rate mortgages in January are a dim and distant memory. Bar the occasional period of stability, fixed rates have mainly been rising in the months since. 

The air of uncertainty that ran through last month’s forecast meant there was little change in the average cost of fixed-rate mortgages in June. There were several instances where a mortgage lender announced it was lowering the rates on certain fixed-rate deals, but raised the cost of others at the same time. 

As a result, Rightmove data shows the average rate on five-year fixed-rate mortgages of 5.02% on 26 June has barely changed from 5.04% at the end of May. It is also exactly the same as at the beginning of the year. On two-year fixed-rate mortgages, the average rate of 5.42% is only slightly up from 5.41% at the end of May, and is only marginally different to the 5.43% seen at the start of 2024. 

However, depending on your deposit or the equity you have as an existing mortgage borrower, typical rates have decreased for certain borrowers and increased for others since the turn of the year. For example, average rates on two-year fixed-rate mortgages if you have a 15% deposit and are borrowing at 85% loan-to-value have dropped from 5.55% to 5.42% in the year-to-date. But if you have a 5% deposit and need a 95% loan-to-value mortgage – as a first-time buyer typically would – average two-year rates are now 6.12%, up from 5.81% at the start of the year.

Bank wants certainty for base rate to fall  

Whether cheaper mortgages are on the horizon relies heavily on the next round of relevant economic data and what the policymakers at the Bank of England take from those figures. 

The voting pattern at the June rate-setting meeting was unchanged from the previous meeting in May – the same two MPC members voted for a 0.25% reduction in the base rate to 5.00%, and the same seven voted to keep the rate on hold. The big difference in June was that the minutes of the meeting described the decision of some of those who voted for no change as ‘finely balanced’. 

Confirmation the day before the announcement that consumer prices index (CPI) inflation in May had fallen back to the Bank’s target level of 2% was big news. Interest rates were increased to bring inflation down, so the scene may now be set for rates to start falling. 

“We need to be sure that inflation will stay low and that’s why we’ve decided to hold rates at 5.25% for now,” explained the Bank’s governor Andrew Bailey, of the decision. Reading between the lines, the conclusion drawn by many is that the first rate cut since March 2020 may be only a steady set of inflation data away.

Inflation and election hold the key

The next inflation figures are revealed on 17 July, two weeks ahead of the next base rate announcement on 1 August. As happened this time, it will be important that the inflation readings come in as economists expect or better.

One potential sticking point could be services inflation, which has remained higher than some would like. Though encouragingly, the Bank believes this could be due to short-term volatility and factors which only change annually, such as yearly price rises, rather than anything more persistent.

Some commentators also wonder if the general election will give the Bank reason to pause for thought again in August. The thinking here is that the outcome and any new plans both have the potential to affect the economy. However, there have also been suggestions that the cut may have been made in June if it hadn’t been necessary for the Bank to keep its counsel in the run-up to an election.  

“If the consensus is that the Bank will move in August, we could expect swap rates to come down and mortgage rates to follow,” Ben Allkins, head of mortgages and protection at mortgage broker Just Mortgages, told NerdWallet UK. 

“Further positive news on inflation in July could also play a role in influencing swap rates too. With the Bank upgrading its economic growth forecast to 0.5% in Q2 2025, as well as growing positivity around longer-term inflation, it does certainly improve the chances of an August cut. My hope, and I’m sure the hope of many people looking to buy or remortgage, is that it comes sooner rather than later.”

Image source: Getty Images

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