What next for mortgage rates?

Mortgage rates are on the rise for the first time in eight months, as lenders exercise caution ahead of possible tax rises in November’s Budget.

Typical rates on two and five-year fixed mortgages edged up by 0.02 percentage points over the last month, having moved downwards consistently since February. 

The average two-year fix is now 4.98 per cent while the average five-year fix is 5.03 per cent, according to new data from rates scrutineer Moneyfacts.

On a £200,000 mortgage being repaid over 25 years that would mean paying either £1,167 a month or £1,173 a month. 

Fixed rate mortgage pricing is most heavily influenced by where money markets expect interest rates to head in the future.

After entering a historic deadlock on the most recent decision, the Bank of England looks unlikely to cut rates again in 2025. 

And with inflation remaining high, up 3.8 per cent in the 12 months to August, there is a greater chance of that scenario playing out.

This means mortgage rates are unlikely to experience big falls for the time being – at least until further base rate cuts are thought to be likely. 

For the vast majority of households, a fixed mortgage rate somewhere between 3.8 and 5 per cent should be achievable depending on the level of equity or size of deposit.

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Mortgage rates: what happened

The Bank of England held base rate to 4 per cent last month. However, base rate has dropped by 1.25 percentage points since August 2024 when it was first cut from 5.25 per cent.

It’s fair to say the mortgage market is somewhat more settled now. 

In 2023, a combination of base rate hikes and worries over inflation figures saw average two-year fixed mortgage rates reach a high of 6.86 per cent in the summer, according to Moneyfacts, while five-year fixed rates hit 6.35 per cent. 

However, mortgage rates still remain far higher than borrowers had enjoyed prior to the surge in 2022.

Little more than three years ago, the averages were hovering around 2.5 per cent for a five-year fix and 2.25 per cent for a two-year. 

As recently as October 2021, some of the lowest mortgage rates were under 1 per cent.

Will mortgage rates go down or up? 

The current expectation is that the Bank of England will not cut rates again in 2025, though there is still a chance it could make one further reduction.

This expectation has fed through into Sonia swaps, an inter-bank lending rate which forecasts where mortgage rates will be in two or five years. Lenders use this to determine fixed-rate mortgage pricing.

As of 17 October, two-year swaps are at 3.59 per cent and five-year swaps are at 3.63 per cent – only slightly below the lowest mortgage rates.

These will need to fall further for fixed rate mortgages to see any further dramatic falls.

Inflation and mortgage rates spike

Mortgage rates first began to increase towards the end of 2021, when inflation started to rise, resulting in the Bank of England increasing base rate to try and combat it. 

The aftermath of the Covid lockdowns, combined with Russia’s invasion of Ukraine in February 2022, triggered a huge inflation spike. Central banks were caught on the hop and rushed to try to rein this in with higher interest rates.