Mortgage interest rates: when will they come down?

Mortgage rates have fallen below 6% on average, but borrowers must still grapple with higher costs to get on or move up the property ladder. 

Last year, customers saw mortgage pricing hiked by consecutive increases to the base rate, as the Bank of England (BoE) attempted to tackle chronically high inflation levels.

But recently, there has been a "plateau" in interest rates, said Forbes Advisor, made possible in part by "continued cooling inflation". The latest figures show inflation dropped from 4% in January to 3.4% in February. In addition, at the end of March, the Bank of England once again kept interest rates unchanged "as was widely expected", the website added. 

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Buyers will be keeping an eye on this base rate "like never before", said Zoopla, but the situation has markedly improved since last year. In June 2023, the average five-year fixed-rate loan for a 75% deal peaked at 5.8%, adding "hundreds of pounds to monthly mortgage repayments". But that same deal has now fallen to an average rate of 4.4% in good news for buyers and homeowners alike. 

But while the "improving situation" has seen rate cuts in recent months, added MoneyWeek, these have "now started to slow – and in some cases, rise". Rates are also still "more costly than has been the norm" in the last decade, meaning potentially higher monthly repayments for homeowners and buyers. 

Although many will be protected from these hikes if they are currently locked into an agreement, as borrowers "roll off fixed-rate deals", there may be "financial pain" to contend with, warned Property Reporter.

What determines mortgage rates?

Lenders consider a range of factors when setting their mortgage rates.

One factor is the cost of borrowing, known as the interest rate, which is set by the Bank of England (BoE) base rate.

If the BoE's interest rate rises, home loans will usually become more expensive as lenders "pass on the increase in the bank rate to their customers", said MoneySuperMarket. So a higher base rate usually translates to higher monthly mortgage payments.

Another consideration is the cost the banks face for obtaining funds to lend on the financial markets, which is based on swap rates. These are "the yardstick by which they lend money to each other", said the i newspaper.

When swap rates are higher, the newspaper explained, lenders push mortgage rates up so they can maintain a profit.

 When will mortgage rates come down again? 

Those "holding out" for lower rates in 2024 are likely to be disappointed, said Zoopla, as they are "unlikely to decline much further" this year, even if inflation or the BoE's base rate were to change.

This is because expectations of a drop in interest rates "are already priced into fixed-rate mortgages today", explained the property company's executive director, Richard Donnell. 

With economists currently predicting the base rate to drop to 3.5% by the end of 2025, this would "imply mortgage rates remaining in and around the 4%+ range", he added. 

Although what happens after the first rate cut is "anyone's guess", said This is Money, it may be worth looking to the United States for potential clues. As UK base rate moves "have tended to mirror the Federal Reserve in the US", how the American economy develops will "play a major role in what happens over here".

Which mortgage should you choose?

There are two main mortgage products: fixed rates and trackers.

Fixed-rate borrowers pay a set amount each month for a defined period, which can make it easier to budget and means your payments remain steady even if interest rates rise, said Money.co.uk.

This may sound attractive when rates are low, but "think carefully before committing for too long as some fixed-rate mortgages may have an early repayment charge", the financial website said. Plus, if interest rates go down during the fixed-rate period, your payments won't, the website added.

A tracker mortgage usually follows the BoE's base rate, and "huge numbers" of people have been on these mortgages "hoping for fixed deals to come down" before they secure their loans, said The Telegraph. 

However, there is always the risk that rates will rise even higher, "leaving you gambling if you don't fix, because then you will be at the mercy of a higher tracker, therefore higher mortgage repayments", warned Online Mortgage Advisor.

With the cheapest fixed-rate deals now below the base rate, those who have chosen to hold out on tracker rates "may be wondering if it's time to switch", The Telegraph added.

Ultimately, this decision "depends on the situation", Ashley Thomas, director at Magni Finance, told the newspaper, such as the "risk" a person is willing to take. 

How to boost your chances of getting your mortgage approved

Lenders will typically use an income multiple of 4 to 4.5 times the salary per person when assessing a mortgage application, sometimes rising to 5 or 5.5 times for higher earners, said The Times Money Mentor, but you will need to pass tough affordability tests.

This involves examining your income and outgoings. So "the more money you spend each month, the less you might be able to borrow", the website said.

You can boost your chances of getting a mortgage by checking your credit report – a record of all your debts such as loans and credit cards and how good you are at making repayments.

These reports are compiled by providers such as Experian, Equifax and TransUnion and calculate a credit score based on the debts you have and your repayment history as well as whether you have ever been made bankrupt or received county court judgments.

The report gives a lender an idea of whether you are a responsible, reliable borrower and likely to repay the debt. "Usually, a higher score means you’re seen as lower risk," said Experian.

You can improve your creditworthiness by making payments on loans, credit cards and bills on time and by getting on the electoral register so lenders can verify who you are, said Equifax.

Be careful, though, as making lots of applications may suggest to lenders that you are reliant on credit, so if you plan on applying for a mortgage, "it might be helpful to be selective about what other loan applications you make", Equifax added.

In recent months, things have been looking up for first-time buyers, who "are out in force" and purchasing 33% of homes so far this year, an "all-time high", said This is Money. This is a "sharp increase" compared to 29% in 2023. 

Those looking to get on the first rung of the property ladder have been given "a leg-up" with the return of low- and no-deposit mortgages, said MoneyWeek. For example, Yorkshire Building Society has launched a £5,000 deposit mortgage product for homes worth up to £500,000, ideal for this group as a deposit "can often be the biggest barrier for first-time buyers". 

However, while the deal "provides a viable option" for those with a smaller deposit, it is important to consider the drawbacks such as costs and the "higher risk of falling into negative equity". 

How to find support if you are struggling to pay your mortgage

As mortgage rates are much higher than they have been in a while, many people who "had become accustomed to ultra-low interest rates" have been struggling, said This is Money. The website cited recent BoE data which showed arrears rose to £20.3 billion in the three months to December 2023, 50.3% higher than a year earlier. 

While arrears "might sound like a scary term you'd rather not think about", it is important to tackle the problem head-on as it "won't just magic itself away", added Money Saving Expert.

The first best step is to contact your mortgage lender as an "urgent priority", as missing a mortgage payment without notifying a lender risks "starting the clock towards repossession", the financial website added. 

Support available may include temporary payment arrangements, lengthening the term of your mortgage, or switching temporarily to interest-only repayments.

You can also get free housing advice from Shelter and support on managing debts from charities such as National Debtline and StepChange, added MoneyHelper.

Benefit claimants, such as those on Universal Credit, may be able to get help with some of their monthly repayments through the government's Support for Mortgage Interest (SMI) scheme.

However, it may also be useful to reassess finances, for example, by undertaking a budget or checking if you are entitled to any benefits. These are "other ways to ease the financial pressure", said Money Saving Expert, and worth exploring even if lender help is sufficient.