According to a report from UK Finance, a banking trade association, there’s an anticipated 8% decline in lending rate for house purchases in 2024. This forecast is attributed to higher interest rates and increased household expenses, resulting in a more stringent mortgage credit access based on affordability measures. The expectation extends to an overall decline in lending rate across various sectors, accompanied by an increase in repossessions. However, a more positive lending outlook is predicted for 2025.
UK Finance also highlighted an estimated drop in house purchase lending in the UK, decreasing from £130 billion in 2023 to £120 billion in the upcoming year. James Tatch, the head of analytics at UK Finance, pointed out the challenges faced by potential and current mortgage borrowers in 2023. These difficulties stemmed from higher interest rates, elevated living costs, and persistently high house prices relative to income levels. He also noted that many existing customers opting to refinance preferred product transfers with their current lenders, which bypass affordability tests.
Throughout the past year, the mortgage market experienced significant fluctuations following the surge in mortgage rates following the mini-budget in September 2022. Within a short span, the average two-year rate rose from 4.74% to 5.17%, as reported by Moneyfacts.
Multiple base rate hikes in 2023 aimed at combatting persistently high inflation contributed to mortgage rates surpassing 6.5% during the summer. However, recent trends show a decline in mortgage rates. Why this shift? And will this downward trend continue into 2024?
The drop in mortgage rates can be attributed to favorable inflation data and sentiments that interest rates may have reached their peak, notably after the Bank of England (BoE) maintained the base rate in December. Speculation among experts suggesting potential rate cuts from March 2024 is good news for homeowners.
Declining Swap rates, which reflect anticipated future interest rates, have also played a role. These rates are crucial as they influence the pricing of fixed-rate mortgage deals. Additionally, lenders are motivated to reduce rates due to the slowdown in the housing market, affected by high mortgage rates.
Currently, the average two-year fixed mortgage rate for those with a 40% deposit stands at about 4.8%. There are projections indicating rates might dip to approximately 4% by the year’s end.
Predicting mortgage rates for 2024 remains challenging due to various influencing factors like inflation, interest rates, and swap rates. The likelihood of a base rate cut next year depends heavily on the trajectory of UK inflation, which recently fell to 3.9%—its lowest point in over two years.
Anticipated further declines in inflation throughout 2024, possibly reaching the BoE’s 2% target earlier than expected, suggest a potential base rate cut. Private bank Berenberg’s data suggests the base rate could drop to 4% by the year-end in such a scenario, signaling continued reduction in mortgage rates—a positive development for homeowners.
Given these trends, particularly for variable-rate mortgage holders directly impacted by the base rate, homeowners may consider exploring fixed-rate deals. However, these predictions are subject to change due to multiple influencing factors, even though rates are expected to remain elevated compared to historical lows.