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Published 26 July 2023
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Signs Mortgage Rates May Have Peaked After Inflation Falls

Fixed-rate mortgages begin to fall and base rate predictions are revised down after inflation recorded a larger-than-expected drop. Here are our latest mortgage rate predictions.

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UK mortgage rate forecast for August 2023

There are hopes, and tentative signs, that mortgage rates may be near to or already at their peak, after inflation in the UK dropped by more than expected in June and fixed rates began to fall. 

With the base rate of interest rising 13 times in a row since December 2021, mortgage holders have been bearing the brunt of the Bank of England’s attempts to bring inflation back under control. However, following the news that Consumer Prices Index (CPI) inflation fell to a 15-month low of 7.9% in June, financial commentators are suggesting that the Bank may have the room to be less aggressive in any rate increases it decides are warranted going forward. In turn, it follows that the pressure on mortgage lenders to carry on raising mortgage rates may begin to ease. We have already seen some lenders quickly responding by lowering the cost of their fixed-rate mortgages.  

Base rate still predicted to rise

Amid the headlines, it’s important to keep in mind that the base rate is still expected to rise again – what has changed following the latest inflation announcement is that its predicted peak is being revised down by the markets and many financial experts. 

Following four months in which inflation data had come in higher than expected, the general consensus, and our previous mortgage rate prediction, suggested that the base rate would peak at 6% some time towards the end of this year or early in 2024. However, with the June inflation reading of 7.9% dropping significantly from 8.7% in May, and beating the forecasted 8.2%, it seems the action the Bank has taken already may be working more effectively than originally thought. A repeat of the 0.5 percentage point increase seen when rate-setters at the Bank last met on 22 June, which took the base rate to a 15-year high of 5%, also appears less likely. 

“While the situation around inflation is improving, the rate is still high and the Bank of England will want to continue with its strategy of regular increases, but the pressure of having a 0.5% increase in August has receded,” says Justin Moy, managing director of independent broker EHF Mortgages. “Instead, I feel a 0.25% increase in August, followed by another 0.25% in September, achieving a high of 5.5% will be as far as the Bank of England will aim to go.”

For those with a variable rate mortgage, including tracker mortgages where the interest rate follows the base rate, it means there is probably more pain to come. If the forecasts prove accurate, the only consolation is that any future rate increases may not now be as large as they could have been. The next base rate announcement is on 3 August.

Fixed mortgage rates are already falling…

The encouraging news in respect of fixed-rate mortgages is that some lenders reacted almost immediately to the inflation figures by lowering their mortgage rates. The day after the inflation announcement, Moneyfacts reported that the average rate on two-year fixed-rate mortgages had dropped to 6.79%, down from 6.81% the day before. Similarly, the average rate on five-year fixed-rate mortgages dipped to 6.31%, from 6.33%. The financial data provider said it was the first time that both rates had fallen simultaneously since May. 

“The forecast expectations of inflation reducing from August and coming down to 4-5% by the end of 2023 is priced into mortgage rates,” says Barry Jones, director and head of financial planning at Watts Mortgage and Wealth Management. “If the data comes through as expected then we would expect to see a gradual reduction in the prices of fixed rates, as the market can see the end of the interest rate increases with more clarity.”

Those searching for a fixed-rate mortgage will welcome the respite from the stream of rate rises seen in the past few months. But at the same time, it’s too early to say with confidence that meaningful rate decreases are definitely on their way. 

…but remain much higher than before

Even if mortgage rates do start to fall, those looking to remortgage to a new fixed-rate deal in the coming weeks are still likely to be faced with rates much higher than what they are used to paying. They are also likely to remain notably higher than the rates that were available just a couple of months ago. 

“Fixed rates will eventually start to fall a little, as the expectations of that 6% base rate diminishes, and we may see some positivity with fixed rates in Q4 2023,” says Moy. “However, the combined effect of the most recent rate increases will start to filter through to a significant number of borrowers before Christmas, unfortunately. And if inflation digs its heels in and stalls, then the Bank of England can only keep pushing the base rate upwards.”

Image source: Getty Images

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