Mortgage rates expected to come down as bank rate stalls

What’s happening with mortgage rates right now?

Mortgage rates are on track to fall below 5% this year.

The latest pause in the Bank of England’s base rate rises, amid better than expected inflation news, is good news for buyers, mortgagees and sellers.

The amount banks need to pay for borrowing money has now fallen, giving them wiggle room to reduce mortgage rates – and they are starting to creep downwards.

  • Lenders reduce mortgage rates as bank rate holds

  • Buyer confidence increases as borrowing rates edge closer to sub 5%

  • Buyer enquiries increase by 12%

What 4% mortgage rates mean for the housing market

The closer mortgage rates get to 4%, the more buyers will come back to market.

That’s good news for sellers, as it will support both house sales and house prices.

Our Executive Director of Research, Richard Donnell, says: ‘Our consistently held view is that mortgage rates over 5% mean lower sales and year-on-year price falls.

‘We expect mortgage rates to start falling slowly in the coming weeks into the high 4% range.’

Right now, across the UK’s biggest lenders, the average cost of a 5-year 75% LTV fixed-rate mortgage is 5.1%.

Back in spring 2023 it fell to 4.2%, which boosted buyer demand and the number of sales agreed.

There is still some uncertainty over the outlook for inflation and how quickly it will fall back to the Bank of England’s 2% target, but it is ultimately lower mortgage rates that will increase buying power over the next 12-18 months.

More buyers will come to market once mortgage rates get below 4.5%

House prices have fallen at a modest rate this year, despite the 20% hit to buying power triggered by mortgage rates increasing since early 2022.

However, a silver lining is beginning to emerge in the housing market: this September saw more buyers coming back to the market.

And enquiries to estate agents are up 12% since the August bank-holiday weekend.

While this improvement comes from a low base (demand remains 33% down on what it was a year ago), it means the housing market is now tracking more closely to where it was in 2019.

And while this uptick is partly seasonal, it also reflects improving consumer confidence, which is now at a two-year high, amid expectations of lower mortgage rates.

Donnell adds: ‘It’s clear that some buyers are returning to the market this autumn, having delayed home moving decisions as base rates moved ever higher.

‘Many others are waiting on the outlook for mortgage rates and holding their requirements for their next purchase.

‘The quicker average mortgage rates (for 5-year 75% LTV fixed-rates) move towards 4.5% or lower, the sooner we will see buyers return to the market.

‘This doesn’t mean prices will start to rise but it will support sales volumes.’

Why house prices aren’t tumbling in 2023

Stricter lending regulations, where mortgagees are stress-tested to prove they can still pay their mortgages at up to 8% rates, have prevented larger house price falls this year.

That’s because we’re not seeing high numbers of forced sales, where mortgagees can no longer afford their repayments.

Instead, homeowners are using alternative routes, like extending their mortgages over a longer period of time, to lower their monthly repayments amid higher borrowing costs.

A buoyant jobs market is also helping mortgagees to keep up with those repayments.

But it remains a buyers’ market right now, with the average seller offering a £12,125 discount to sell their home.

  • The latest pause in bank rate rises has boosted buyer confidence

  • 12% more buyers have returned to the market since August

  • And buyers aren’t making any compromises on what they want from their next home

Buyers, boosted by the prospect of lower mortgage rates, are returning to the housing market.

Estate agents have seen enquiries on homes for sale rise by 12% since the August bank holiday.

And while this improvement comes from a low base (buyer demand is still 33% down on what it was this time last year) demand is now closely tracking  2019 levels.

September traditionally sees more buyers returning to market, but this uptick in enquiries also demonstrates improved consumer confidence, which is now at a two-year high.

This is particularly good news for sellers in southern England and the capital, who have been hit hardest by rising mortgage rates impacting demand: buyer numbers are up 19% in the South East and 16% in London.

The number of new sales agreed has also increased and is now closely tracking 2019 levels.

In 2021, the number of homes available for sale plummeted amid a buying frenzy. But supply levels are now returning, giving buyers more choice.

Prospect of lower mortgage rates boosts buyer confidence

Our Executive Director of Research, Richard Donnell, says: ‘Better than expected inflation news and a pause in base rate rises have softened expectations over the trajectory of future borrowing costs.

‘Our consistently held view is that mortgage rates over 5% mean lower sales and year-on-year price falls.

‘The closer mortgage rates get to 4%, the more buyers will come back into the market, supporting sales and pricing levels.’

Buyers unwilling to compromise on next home priorities

Buyers aren’t giving up on their hopes of achieving a home that will suit their needs for the next 10 years.

Rather than making compromises, first-time buyers are looking at longer mortgage terms to ensure the home they buy will suit their needs.

While mortgage rates running at over 5% have reduced buying power by 20%, buyers are still looking to buy the same type and size of property, at the same prices, as they were in the summer of 2022.

There are some regional variations: in London, for example, demand for apartments has increased among first-time buyers, but the overall trend is that buyers are holding out for the home they really want.

‘It seems many buyers are waiting for either a fall in house prices or mortgage rates,’ says Donnell.

‘This is why sales volumes are set to be 20% lower this year and 28% lower for those buying with a mortgage.

‘An unwillingness to compromise is a rational approach as buying a home is a big and expensive life event.

‘Younger buyers are taking out longer mortgages to boost buying power, as they want to buy a home they are going to be happy in for a decade or longer.’

House prices fall as buyers wait for lower mortgage rates

Many homeowners have delayed moving while the mortgage market has remained volatile this year and this, in turn, has impacted house prices.

Our index has recorded a 0.5% price fall over the last year – the first annual decline for over a decade – since June 2012.

The biggest house price falls are being seen in southern England, where homes are more expensive, meaning buyers need bigger mortgages to secure them.

In Scotland, where prices are 40% below the UK average, annual house price growth is running at +1.6%.

Over the whole of 2023, we expect house prices to fall 2-3% from where they were in 2022.

But that would mean prices are still 17% higher than they were at the beginning of 2020.

Even if mortgage rates dip below 5%, house prices are likely to continue falling this year and into the first part of 2024.

But a modest dip in prices isn’t enough to improve buyer affordability. That has to come from lower mortgage rates.

  • This is the first time house prices have fallen over the course of a year since 2012, although the falls are small at -0.5%

  • House prices are falling because of higher mortgage rates – the buying power of the average mortgaged household is 20% lower than at the start of 2022

  • We expect to end the year with house prices 2% to 3% lower than at the start of 2023

  • House prices are falling the most in the South East and East of England, where prices are down -1.5% on a year ago

  • House prices are still rising in Scotland, the North of England and Wales, although this has slowed compared to last month

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