On the 7th of November 2024, the Bank of England’s Monetary Policy Committee (MPC) decided to lower the base rate to 4.75%, the lowest level since June 2023. This decision was made amid fluctuating inflation rates and increased living costs.
Throughout 2024, UK inflation steadily declined from 4.4% at the end of Q1 to 3.9%, then fell further to 2% by June. In October 2024, inflation dropped sharply to 1.7%, its lowest level in over three and a half years.
In response to high inflation in 2023, with rates peaking at 11.1% in October 2022, the Bank of England had raised the base rate multiple times to help curb rising prices. This approach successfully brought inflation down throughout 2024, though it stayed above the Bank’s 2% target for much of the year. By August, inflation held at 2.2%, but by September, it dipped below the target, reaching 1.7%—the lowest in over three years. This decline in inflation has increased the likelihood of further rate cuts in future policy meetings.
Interest Rate Predictions
Looking ahead, analysts widely agree that UK interest rates have passed their peak, with the base rate having reached its highest level in August 2024 before beginning to decline. Now below 5% for the first time since June 2023, earlier predictions of rates hitting 6% have been revised down, reflecting a softer economic outlook. This shift indicates that rates may continue to ease, providing relief to borrowers after the peak in August.
It is widely predicted that the base rate will drop twice by another 0.25% further in 2025.
Given the recent base rate drop and these new predictions, the landscape of mortgage rates in 2024 into 2025 is set to change. Let’s explore what this means for homeowners and potential buyers.
Mortgage Rate Predictions 2025
Mortgage rate predictions for 2025 suggest further drops in the base rate. Bank of England’s decisions, inflation rates, and global economic events all play an essential role in shaping these changes. As of November 2024, the average rate on a two-year fixed mortgage deal sits at 4.90%, and the average rate on a five-year fixed mortgage deal sits at 4.63%. These rates are still near some of the highest levels since August 2008, around the peak of the financial crash. However, with the recent drop in the base rate, mortgage rates may continue to trend downward, potentially approaching the 4% mark in the coming months.
The last Bank of England meeting was on the 7th November 2024, when they decided to drop the base rate 0.25% from 5% to 4.75%. This could directly influence mortgage rates throughout the rest 2025. Unexpected economic events could alter these predictions as well.
Leading Economists Predictions
Leading economists have updated their forecasts, predicting that the Bank of England’s base rate could fall to as low as 3% by the end of 2025, a slight revision from earlier expectations of 3.25%. This is due to softer inflation and wage growth projections. As a result, mortgage rates are also expected to decrease, potentially falling from their current levels of around 5% to about 3.5% by the end of 2025.
Goldman Sachs also aligns with this outlook, predicting the first rate cut could occur as early as May 2025. They suggest that rates could drop by 0.25% at every policy meeting, bringing the base rate down to 3% by May 2025. This could result in significant savings for households, easing the financial burden for many mortgage holders
With the Bank of England’s proactive approach to cutting rates, 2025 may bring more favorable conditions for the mortgage market, particularly for those looking to secure new loans or refinance existing ones.
Based on current market predictions, the Bank of England is expected to reduce the base rate by 0.25% twice in 2025. This outlook depends on inflation continuing its downward trend, with inflation now sitting at 1.7% as of November 2024. If inflation remains stable, these interest rate cuts could further ease borrowing costs in the coming months.
As inflation drops, we are starting to see a swing for 2-year and 3-year fixed rates over the longer 5-year rates, which will be the opposite of what we have seen over the last 18 months. We are already seeing mortgage rates drop from 5% to 4%, and going into 2025, they are predicted to drop even further, potentially even to 3%.
I can see a demand and trend for tracker mortgage rates in 2025 and the likelihood we may see new innovative products launched by the mortgage lenders. These could be tracker rates that would allow you to convert to a fixed rate during the term without paying extra fees. – Steve Roberts
Fixed Rate Mortgages: Should You Fix Your Mortgage Rate Now?
In recent weeks, many mortgage lenders have withdrawn numerous fixed-rate deals and raised rates on their most competitive products, responding to concerns about potential further rate hikes by the Bank of England.
With the BOE base rate now at 4.75% and market sentiment suggesting possible increases, it may be wise to consider fixing your mortgage rate if you’re concerned about rising interest rates and managing monthly repayments.
Even if you’re currently on a fixed-rate mortgage set to expire in six months, you may still lock in a competitive rate now to begin when your current deal ends, avoiding early repayment charges from your existing lender.
How is the Bank of England base rate set?
The Monetary Policy Committee of the Bank of England is responsible for setting its official base rate. Meeting approximately every six weeks, MPC meets to decide on any potential changes and publishes its decision and meeting minutes on its website.
The decision on setting the base rate is informed by several economic indicators, including employment, inflation, and GDP. The current Governor of the Bank of England Andrew Bailey continues to use an established list of 18 economic indicators as part of his Monetary Policy Committee decision-making process outlined by former Governor Mark Carney.
When is the market predicting mortgage rates will change?
The market’s predictions regarding mortgage rates have seen significant changes recently. As of 7th November 2024, the Bank of England (BoE) lowered the base rate to 4.75%. This decision was influenced by the drop in inflation, which was 2.2% annually but has now dropped to 1.7% now well below the BoE’s target rate of 2%.
Given these new predictions, homeowners and potential buyers alike should carefully evaluate all their mortgage options when making this important decision. The Bank of England will next meet on the 19th December 2024, to decide whether interest rates will remain the same or decrease, it is likely the base rate will drop again in 2024. If inflation continues to drop in the second half of 2024 it is believed the base rate will continue to remain the same or even drop slightly.
What are the key indicators that will impact interest rate changes?
The Bank of England uses several economic indicators when deciding whether or not to increase interest rates, including:
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- Inflation: As of October 2024, UK inflation dropped to 1.7%, down from 2.2% in August. This decline brings inflation below the Bank of England’s 2% target, marking the first time it has fallen below target in years.
- Base Rate Changes and Support for Low Rates: The Bank of England’s Monetary Policy Committee (MPC) lowered the base rate to 4.75% in November 2024, reflecting the continued drop in inflation. Speculation suggests that if inflation remains low, the MPC may consider further rate cuts into 2025.
- Economic Growth: The UK’s GDP grew by 0.4% in the first quarter of 2024 and by an estimated 0.3% in the second quarter. This moderate growth aligns with the slow but steady economic recovery.
- Bank of England Forecasts: The Bank expects GDP growth to be around 0.3% in the latter half of 2024 as inflation continues to cool and economic conditions stabilize, indicating cautious optimism for economic growth.
- Unemployment: The UK unemployment rate held at 4.3% through the second quarter of 2024, with minimal change, reflecting stable labor market conditions.
- Wage Growth: Regular pay (excluding bonuses) increased by 6.2% annually from March to May 2024, while total pay rose 5.8%. Wage growth has remained relatively strong, contributing to sustained household spending amid inflationary pressures.
- Economic Outlook: The UK economy is projected to grow by 0.3% for 2024 and potentially accelerate to 0.9% in 2025. Falling inflation and the prospect of lower interest rates in 2025 are expected to support this gradual economic improvement.
What to do with my mortgage in 2025?
The ability to remortgage and fix your mortgage at the same sort of rate has become more difficult over recent years as the rules surrounding the affordability checks when applying for a mortgage were tightened leaving some borrowers stranded on their existing deals.
It’s important to calculate the impact of future interest rate rises and seek advice from a mortgage expert ahead of time by following the steps below. Whether you are on a tracker mortgage, variable rate mortgage, or looking to remortgage your existing fixed rate deal that is coming to an end the steps below will take you a few seconds but could prevent your mortgage repayments crippling your finances in the future and help you secure fixed mortgage rates while they are still available.
Step 1 – Determine your current mortgage situation
Before you can determine the best course of action for your mortgage, it is important to understand your current situation. This information includes what type of mortgage (variable, fixed rates, or tracker rates), your current rate, and loan term. If you need help understanding these details further, contact your mortgage lender or review your documents to gain a clear picture.
Step 2 – Calculate the impact of an interest rate increase on your mortgage payments
An interest rate rise calculator allows you to quickly assess the potential effects of an increase in interest rates on your monthly mortgage payments. Simply input details such as loan amount, term length, and current interest rate before increasing it in various scenarios to calculate potential changes in monthly payments based on different interest rate scenarios and figure out how much additional funds would need to be set aside in case an increase takes place. This tool gives a good indication of what to budget for in case an interest rate increase occurs.
Step 3 – Seek advice from a mortgage expert
If an interest rate increase will have an adverse impact on your mortgage payments, consulting a mortgage expert is highly advised. They can assess the housing market as well as your current financial situation and assist in understanding potential solutions such as fixed rate or alternative types of loans; also helping find you the most competitive rates and terms possible according to your unique situation.
Step 4 – Act quickly if you decide to fix your mortgage rate
When considering fixing your mortgage rate as the optimal course of action, acting swiftly is key. The lowest fixed-rate mortgages offers often vanish quickly when there are indications from the Bank of England of potential rate hikes; take immediate steps to secure one before it disappears! A mortgage expert can help compare different mortgage deals and assist in the application process to make sure you secure an excellent rate.
The best way to find out your mortgage options
One way to find the right mortgage options for you is to collaborate with an independent mortgage adviser. While price comparison sites may seem like an effective solution, it’s important to remember that many deals only available through advisers aren’t listed here and may only appear after credit checks have taken place – which could negatively impact future applications for loans.
Due to these considerations, working with an independent mortgage adviser is often beneficial; they can assist in finding you the most beneficial mortgage deal from lenders that will actually lend to you – approximately 70% of borrowers opt for this route. To start off your journey toward refinancing, reach out to an adviser or mortgage broker. With fixed-rate deals being withdrawn on a daily basis, it’s never been more important to be on top of your mortgage options before we see further interest rate rises.
Further reading
- What happens when my fixed rate mortgage ends?
- The Different Types of Mortgages Explained
- 2023 see’s a surge in 35-Year and 40 Year Mortgage Terms
- House Prices Falling Boosts Mortgage Product Transfers
FAQs
How does the base rate affect mortgage rates?
The base rate influences mortgage rates directly. When it drops, mortgage rates often follow, making borrowing cheaper. This can lead to lower monthly payments for homeowners on variable or new fixed-rate mortgages.
Are further base rate cuts expected in 2025?
Yes, economists predict additional cuts in 2025, possibly bringing the base rate as low as 4.25%. These cuts depend on inflation trends and overall economic stability.
Should I fix my mortgage rate now or wait?
With rates trending down, fixing a mortgage rate now could lock in stability. However, waiting might offer slightly lower rates in 2025 if cuts continue. Consult a mortgage advisor for the best approach based on your circumstances.
