Mortgage interest rates: when will they come down again?

Mortgage rates are set to fall – good news for homeowners and prospective buyers, due to several factors in the UK and overseas.

The Bank of England's decision to cut its base rate from 5.25% to 5% "has set the stage for renewed optimism in the UK housing market", said Property Reporter.

However, the situation also stands to improve even further for mortgages, as rates could "start to fall faster" due to worldwide market turmoil this week, The Telegraph added. 

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The plummeting of global stock markets is placing increased pressure on the United States Federal Reserve to cut interest rates, which, in turn, "could push the Bank of England to cut rates more quickly than previously forecast". 

But the interest rate cut is not necessarily all cause for celebration. The central bank has "raised a lot of tricky questions" for homeowners, said The Guardian, and rising house prices may ultimately "cancel any gains in lower mortgage rates".  

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. Swap rates are "a contractual arrangement between two parties" involving swapping a set of interest payments for another, said Private Finance, something that happens "over a specific duration". 

Lenders "often see swaps as their cost of funding", and consequently "they need to make a margin on top of these," the website added. They only impact fixed-rate mortgages, but "the higher the swap rate, the higher the mortgage rate" as a general rule of thumb.

 When will mortgage rates come down again? 

Mortgage rates and when they come down hinge on the decision the BoE makes regarding its base rate. The July 2024 rate cut was "the first since 2020", said The Guardian, and "spelled good news for millions of homeowners and would-be buyers". 

However, with the vast majority of existing mortgages on a fixed rate "most people won't see any change", the newspaper added. Only a "chunk" will need to consider what is likely to happen in the next few months "because their current deal is coming to an end".

But while mortgage rate forecasts are prevalent, "no one knows for sure exactly what will happen with mortgage rates in the months ahead", said the HomeOwners Alliance. Although the central bank has "signalled" there "may be scope for a further reduction this year below 5%", the governor is expressing caution.

This is because the Bank must consider various "measures of inflation when deciding how to change rates", said the BBC, and some of these "remain higher than it would like". 

With some sectors of the economy "still seeing significant price rises", this is likely to be a difficult line to tread. 

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.

How to boost your chances of getting a mortgage

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. 

When it comes to the perfect time to buy a home, "it's unlikely you'd time the market perfectly" to secure both low house prices and a low mortgage rate, said The Times Money Mentor. Instead, prospective buyers should think about their "financial and personal situation holistically and do some scenario planning".

However, in some cases, sellers "are taking discounts on asking prices", said MoneyWeek, and "you will have more bargaining power" if you can afford the higher rates.

How to find support if you are struggling

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 MoneySavingExpert.

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 MoneySavingExpert, and worth exploring even if lender help is sufficient.