Declining Mortgage Rates Could Reinvigorate the UK Housing Market

By Nicola Grace MorkelHead of Marketing
17 Apr 2024

Having climbed to over 6% in Autumn in the wake of former Chancellor Kwasi Kwarteng’s mini-Budget last year, mortgage rates have now fallen three months in a row despite the Bank Rate moving in the opposite direction.

According to Forbes, the average 2-year mortgage rate has dropped to 4.28% today, whilst 3-year and 5-year fixed-rate mortgages are pegged at 4.94% and 4.75% respectively. For lower loan-to-value remortgages, options are available at below 4% - an incredible improvement on the average rate of 6% in November 2022.

In more good news, the average amount of time a mortgage is available before it is withdrawn has increased to 28 days, the highest level since March 2022, and up from just 15 days in January. Product choice has increased as the market stabilises with 4,341 different deals currently available compared to 2,258 options in October 2022.

IP Global Ltd Insights - Aerial view of London suburb in the morning, UK

Why Did Mortgage Rates Spike In 2022?

Mortgage rates spiked last year as a result of central banks increasing borrowing costs to curb demand and mitigate hyperinflation. The steep rise in borrowing impacted the rate at which lenders borrow money on fixed-rate deals. This resulted in mortgage lenders reducing and repricing products, which led to a decrease in the number of mortgage options available to buyers. Only 2,258 products were available in October 2022.

Are House Prices Falling?

According to the most recent Office for National Statistics (ONS) data, average house prices have fallen by 0.6% over the year leading up to January 2024. 

The UK Government reports that the average house price in the UK for January was GBP281,913, which is GBP2,000 less in real terms compared to the same period a year ago. 

However, many experts predict house prices will rise again in the second half of 2024 as green shoots have already been seen across some marketing in the latest Zoopla report. A potential silver lining emerges in the latter half of the year. Forecasts suggest a decrease in mortgage rates during this period. This could reignite some buyer interest, leading to price increases in the second half.

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If House Prices Are Dropping, Should I Remortgage?

Think about remortgaging if you are sitting on a variable rate, the average standard variable rate is 6.84% according to Zoopla. Remortgaging to a 5-year fixed rate deal of 5.2% could reduce costs by GBP200 a month on a GBP200,000 mortgage.

There is more competition for long-term fixed-rate mortgages due to volatility, with the gap between 5-year and 2-year products currently at 0.24% - the largest margin for 5 years.

According to Zoopla, UK mortgage rates are likely to rest between 4% to 5% over the next few months, which is indeed higher than in previous years but relatively cheap in a historical context for mortgage rates. The era of cheap money is over. The good news is that lower mortgage rates will reduce any downward pressure on home prices in 2023 as more entrants will be in the purchasing market. RightMove confirmed that since March 2024, the number of sales agreed has risen by 13% compared to the same time in 2023. London has experienced the most significant surge in buyer demand, both overall and for top-of-the-ladder properties, compared to this time last year.

If you’d like to discuss your options for investing in the UK, reach out to us, and we can answer any questions you may have.

FAQS

As of today, the average mortgage rate in the UK is:

  • 5.74 for a two-year fixed-rate mortgage
  • 5.24 for a five-year fixed-rate mortgage
  • 5.84 for a two-year variable-rate mortgage
  • 8.54 for the average standard variable rate (SVR)

These rates are based on a loan-to-value (LTV) of 75%. The LTV is the percentage of the property's value that is being borrowed. For example, if you are buying a property worth GBP200,000 with a 75% LTV, you will need to borrow GBP150,000 and have a deposit of GBP50,000.

Mortgage rates are expected to continue to rise in 2023 as the Bank of England raises the base rate. The base rate is the interest rate that banks charge each other for lending money. When the base rate rises, mortgage rates tend to follow.

Should UK house prices fall to the extent of a market collapse, there would initially be foreclosures and sales, eventually a resurgence would occur as reduced prices attract buyers back. However, this situation also leads to higher unemployment and tighter credit conditions, heightening financial difficulties for those with lower incomes.

Written by Nicola Grace Morkel

Head of Marketing

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