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Published 31 January 2024
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Signs Mortgage Rate Cuts May Slow After Inflation Rise

The period of constant mortgage rate reductions may have passed and the first base rate cut could be delayed after inflation unexpectedly rises. Here are our latest mortgage rate predictions.

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UK mortgage rate forecast for February 2024

Mortgage lenders may be about to press pause on the significant rate cuts seen in recent weeks. The costs of many fixed-rate mortgages have fallen sharply since the turn of the year, with a mortgage rate price war among lenders working to the benefit of borrowers. 

While the general expectation remains that mortgage rates will fall further across 2024 as a whole, some major lenders nudged rates higher towards the end of January following an unexpected rise in inflation, and with concern growing over tensions in the Red Sea.

In the short term, it may be that the pace of rate cuts slows, and there are both ups and downs as lenders take stock. 

Fixed-rate mortgages see big cuts…

The good news for mortgage borrowers is that fixed mortgage rates have been falling fast throughout January. Rightmove data shows average rates at every loan-to-value (LTV) it monitors dropped significantly between 3 and 24 January. The largest cuts were seen on two-year fixed-rate mortgages at 85% LTV, where typical rates fell by 0.58 percentage points, from 5.55% to 4.97%. Between 5 and 28 December, the same rate dropped by just 0.09 percentage points.    

Lower deposit mortgages aimed primarily at first-time buyers also saw notable reductions, with average five-year rates for those with a 10% deposit dropping below 5% for the first time since May last year. As a result, borrowers taking out such deals can now expect to pay around £170 per month less on a £200,000 mortgage over a 25-year term compared to when rates were at recent highs last July. This equates to a saving of more than £2,000 a year, and almost £10,200 over the entire five-year fixed-rate period. 

…but reductions may be about to slow

Competition between lenders has been the primary driver behind mortgage rates falling so fast recently. Mortgage lending has been subdued by higher rates and stretched household finances, meaning offering competitive rates is essential if a lender wants to secure its share of the fewer borrowers looking for a deal. 

However, how much it costs lenders to fund their mortgage lending, which is mainly influenced by base rate expectations and wider global and economic factors, is always changing. At any given time, this means there are limits as to how low individual lenders can drop rates while still making a profit. 

Crucially, the intensity of the price competition seen in January means that these margins are likely already tight. With further room to easily manoeuvre all but squeezed out, some experts believe the regular rate cuts seen of late may be about to end. 

“The next few months will potentially be a bumpy ride for rates,” Justin Moy, managing director of independent broker EHF Mortgages, told NerdWallet in an email. “Lender competition has driven rates lower but we still have external influences such as the Red Sea conflict that may push prices higher and ultimately increased inflation is not what we want to see for mortgage rates.”

First base rate cut expected later this year

The surprise rise in inflation in December will have given lenders reason to pause for thought. 

After inflation fell by more than expected to 3.9% in November, some experts felt the base rate of interest could start dropping as early as March. However, following the announcement that inflation crept higher in December to 4%, as opposed to the further fall forecast by analysts, markets are now predicting the first cut will come a few more months further down the line. 

The latest prediction by the UK economic forecasting group EY ITEM Club is for the Bank of England to begin cutting rates in May. However, others think it may come later – economic consultants Capital Economics anticipate the first reduction in June, while banking group ING is looking towards August. 

For borrowers with tracker mortgages and standard variable rate mortgages who want the rate to drop and their monthly repayments to follow, frustration is understandable. One consolation may be that the next move in the base rate, when it happens, is still expected by most to be down. 

At the time of writing, the base rate sits at 5.25%, but some notable falls are still expected before the end of the year. EY ITEM Club predicts the rate will drop to at least 4.25% by the end of 2024, and perhaps as low as 4.00%. 

Fixed-rate mortgages still forecast to fall

For those with an eye on fixed-rate mortgages, a period of less frantic rate repricing activity may be on the cards. It seems unlikely that lenders can continue with the rate reductions seen of late. Indeed, in the week after the surprise inflation rise was announced, some major lenders bucked the recent trend and increased some of their fixed rates, saying it was in response to “wider market conditions”. 

Some experts believe there could be more instances of rates rising in the short term too. However, over the longer term, the general direction for fixed rates is still expected to be down. 

“With expectations of inflation moving below 2% shortly, I would expect five-year fixed mortgage deals to move towards 3.5% and equivalent two-year fixed deals to 4% or just under, by the end of April,” said Moy. “The speed of rate reductions will slow considerably, more of a shave than a drop, whilst [the] base rate runs around 1-1.5% higher than fixed deals. Once the base rate starts to fall, that will help stabilise rates and keep them in the 3% band for the majority of the year.”

Image source: Getty Images

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