UK mortgage rates could stay higher for longer – when will they fall?

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Cooling inflation rates could reduce interest payments owed on variable mortgage plans, but analysts warn this will not happen yet.

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For those looking to predict changes in mortgage rates in the UK, recent months have shown some mixed signals.

After a period of high inflation in the UK, economists were greeted with good news in October as the rate of price increases continued to decline.

The consumer price index, a common way to measure how quickly costs are rising, was recorded at 4.6% in the year to October, down from 6.3% in September.

Although inflation is still above the Bank of England’s (BOE) 2% target, there has been speculation about a cut in interest rates, which are used as a means of controlling inflation.

For homeowners with variable mortgages, this will be a welcome decision.

If the BOE interest rate falls from its current value of 5.25%, the amount you expect to pay each month will likely decrease.

Before the decision to keep rates stable in September, the UK saw 14 consecutive interest rate rises, meaning those taking out variable mortgage plans saw their payments skyrocket.

However, while many look forward to big cuts in monthly rates, analysts say that won’t happen immediately.

“Whatever interest rate you paid on your mortgage in November, chances are you can budget to pay the same rate for the next six months or so,” said Amy Knight, personal finance expert at Nerdwallet UK.

Why do experts bet on constant rates?

Although inflation data is moving in the right direction, there are a number of reasons why the BoE is hesitant to reduce interest rates and reverse the progress made.

In a news conference Wednesday, Gov. Andrew Bailey reiterated his position from last month: “It is likely that rates will need to remain at these levels for an extended period to bring inflation back to target on a sustained basis.”

This cautious approach will also take into account pessimistic financial forecasts for the UK, such as projections from the Office for Budget Responsibility (OBR).

Earlier this year, the OBR predicted the nation’s economy would grow by 1.8% in 2024 and 2.5% in 2025, but in November these figures were downgraded to 0.7 % in 2024 and 1.4% in 2025.

In addition to this, the OBR expects inflation to remain above the 2% target until the first half of 2025, a year later than previously expected.

The Bank of England will hold its next meeting to set interest rates on December 14, and new inflation data from the Office for National Statistics (ONS) will be released on the 20th.

How to deal with price surges?

If you are struggling with repayments, your lender is there to offer support and advice and one option may be to change your mortgage plan.

For homeowners with a standard variable rate (SVR), it’s easy to switch to a new deal whenever you want, but for those with fixed rate plans, this can be a little trickier.

Whether you stay with the same bank or choose a new lender, leaving your fixed mortgage plan before the limit of your current product has expired often comes with fees, so you need to weigh your options carefully.

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There’s also the option of mortgage forbearance, which means you’ll continue with your current plan, but temporarily suspend monthly payments or make smaller contributions.

According to financial advisors, this is often a risky solution.

“While mortgage forbearance can offer short-term relief to help get your finances back on track, it can lead to your mortgage costing more in the long term and could take a toll on your credit score,” he explained Amy Knight of Nerdwallet.

Fixed rate mortgages offer less flexibility than variable ones, but payments are not directly dependent on the fluctuation of base rates set by the BoE.

In the UK, fixed plan rates have fallen since the end of July however as easing inflation and stable interest rates fill lenders with greater confidence.

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“Homebuyers with a 40% deposit saw the average rate on a two-year fixed rate 60% LTV mortgage fall to 4.90% on November 28, from a peak of 6.38% on July 25,” Knight said.

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