Over the past few years, The Bank Of England has increased their base rate 14 consecutive times in a bid to battle inflation. This has had a direct impact on the mortgage market, inflating mortgage rates and subsequently making it more expensive to purchase a property. But how much have mortgage rates changed? How do mortgage rates impact the housing market? And will rising rates continue into 2024?
Mortgage rates have been increasing since the end of 2021 when the average two-year fixed rate was 2.34%. At the time of writing, average rates have escalated to over 6% for all types of mortgage. Rates began to rise swiftly when previous chancellor Kwasi Kwarteng announced his mini budget in September 2022, which threw the housing market into a state of disarray. This sharp spike in rates can be pinpointed in the graph below. However, as the political climate has stabilised and government leadership is no longer in flux, pricing has started to come down.
The last time rates were this high was in 2008 during the financial crash which saw interest rates and mortgage rates peak. However, rates quickly dipped by 2009 to the relief of homebuyers. At present, rates are starting to come down, with some lenders having reduced their rates multiple times since August. This is most likely because the Bank of England’s anti-inflationary measures are finally starting to have an impact. Inflation sank to 6.7% in August 2023 – a welcome surprise to banks, lenders and property purchasers. Furthermore, the Bank of England chose to keep the base rate the same in its last review. With such positive moves in the right direction for inflation, it is anticipated that the Bank of England may only have to increase their base rate one or two more times before beginning to bring it back down, which would see mortgage rates begin to stabilise and provide homebuyers with more favourable rates.
It’s not just rates that have changed either – five-year fixed rate mortgages have plummeted in popularity, with many buyers choosing two-year fixed rates. Borrowers are concerned about locking themselves in at the current high mortgage rates, and many lenders are promoting a ‘wait and see’ approach to securing a mortgage in the hopes that rates will fall.
Higher mortgage rates slow down the housing market as homebuyers find purchasing a property more expensive. This is reflected in the sinking number of mortgage approvals, with 33,000 fewer mortgages getting approved in January 2023 when compared to a year prior. Banks and lenders have had to change their goalposts as mortgage rates have skyrocketed, with property purchasers seeing their affordability significantly stifled by rising interest rates. Buyers that would be approved for a mortgage back in 2020 when mortgage rates sat below 3% across the board are now being refused deals as rates have more than doubled.
This difficulty in obtaining mortgage approval is seeing many searching homebuyers reduce their budgets by tens of thousands of pounds as they try to find a property they can afford with such high mortgage rates. As a result, this can cause demand in the property market to sink, which in-turn leads to a reduction in property prices.
However, this sinking demand for property isn’t necessarily bad news, as a reduction in property costs can benefit many buyers, especially if they manage to secure a mortgage that has favourable rates. This is how the market will eventually recover – lower house prices will in-turn see demand increase over time, which will then lead to higher prices. This cyclical process has been reflected in the UK market a number of times over the past century, but average prices have still doubled on average every 10-15 years, proving the resilience and long-term potential of UK property.
At the time of writing, the Bank of England base rate has increased to 5.25 as a means of tackling inflation – and it’s working. If this continues, banks will feel more confident in lending money to borrowers for a cheaper price, thereby bringing mortgage rates down. The housing market is currently slowing down with fewer people purchasing property, and more people struggling to meet their mortgage payments. Paired with the steep decline in mortgage approvals, lenders are aware that they will have to reduce rates to attract customers.
In the long term, it is believed that the base rate will peak in early 2024 at 5.75% or 6%. Capital Economics believes that the base rate will then sink to 3% by 2026 as inflation continues to fall. However, this will depend on a number of factors such as the Bank of England’s ability to curb inflation in 2024, how incentivised buyers are to purchase property in a difficult market, and the availability of viable housing to purchase in this supply-demand deficit.
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Here at Centrick, we understand that purchasing a home can be a difficult process. Whether you’re a seasoned investor or a first-time buyer, our team is on-hand to help you purchase your next property with ease. For advice on how to navigate the housing market at this time, recommendations for a reputable local mortgage advisor, or to explore our range of available homes, get in touch using the form below.
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