Buyers are currently watching the Bank of England’s latest Base Rate announcements like never before.
In June last year, the average five-year fixed-rate loan for a 75% loan-to-value mortgage peaked at 5.8%, adding hundreds of pounds to monthly mortgage repayments for buyers and homeowners.
Today, that same mortgage has now fallen to an average rate of 4.4%.
Here’s how that difference pans out in terms of monthly mortgage payments.
Monthly repayments on a five-year fixed-rate 75% LTV over 25 years
Mortgage value | £200,000 property value, 25% deposit | £300,000 property value, 25% deposit | £400,000 property value, 25% deposit | £500,000 property value, 25% deposit |
5.8% monthly repayments | £1,106 | £1,422 | £1,896 | £2,370 |
4.4% monthly repayments | £962 | £1,237 | £1,650 | £2,063 |
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Mortgage rates unlikely to drop below 4% in 2024
However, buyers holding out for lower mortgage rates in 2024 may be disappointed, as they are unlikely to decline much further this year, even if inflation and the Base Rate edge lower.
Our Executive Director of Research, Richard Donnell, says: ‘Expectations of lower interest rates are already priced into fixed rate mortgages today.
‘Lower interest rates would likely result in further modest declines in mortgage rates but how far depends on how low money markets see base rates falling.
‘Economists currently expect base rates to fall to 3.5% by the end of 2025, which would imply mortgage rates remaining in and around the 4%+ range.’
Why are mortgage rates going down?
Mortgage rates began to go down in the latter half of 2023, as inflation dropped from 6.3% in September to 4.2% in December. In February this year, inflation dropped to 3.8% and is expected to meet its 2% target in the coming months.
However, the Bank of England has held the base rate at 5.25% since August 2023, as inflation has stayed higher for longer than expected. It is expected to cut the base rate when it meets in June this year - and by the end of 2025, it's expected to lower it to 3%.
The bank rate determines the interest rate the Bank of England pays to commercial banks that hold money with them. It influences the rates those banks charge people to borrow money or pay on their savings.
What factors affect interest rates?
Inflation is the main reason interest rates are high in the UK at the moment. An unexpected rise in demand - or decrease in supply - can cause inflation to rise.
At the end of 2021, the Bank of England began to raise the base rate in order to reduce inflation and help slow down price rises for everyday items including food, petrol, gas and electricity.
It is working - and inflation has fallen a lot, but the Bank of England needs to keep the base rate high enough to ensure inflation comes back to its 2% target.
Global shocks can also have an impact on inflation, such as wars, pandemics or the blockage of major transport routes like the Suez Canal, as they affect the flow of goods around the globe.
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How buyer affordability could improve in 2024
All that said, there are other ways in which buyer affordability is likely to improve this year: and that’s wages rising while house prices hold steady.
This trend is happening already, and it’s improving confidence among buyers.
‘Rising household disposable incomes are expected to be the primary driver of improved housing affordability over 2024,’ says Donnell.
‘Disposable incomes are projected to increase by 3.5% over 2024, while house prices look set to remain broadly flat over the year.’
In fact, momentum in the housing market is already ticking up and the number of sales agreed has climbed 9% year-on-year.
This, in turn, is encouraging more sellers to come to market, improving the choice available for buyers.
More choice for buyers in 2024
Currently there are 20% more homes for sale than there were in spring 2023, with the average estate agent having around 30 homes on their books.
And more choice for buyers means more opportunity for wriggle room when it comes to paying the asking price.
‘Our view is that a greater availability of homes for sale will keep price rises in check,’ says Donnell.
‘In Q1 2024, the average estate agent had almost 30 homes for sale, a return to the pre-pandemic average.
‘This means buyers have more choice and room to negotiate, especially where homes are failing to attract buyer interest in a timely manner.’
Affordable areas remain popular with buyers
While momentum is up among buyers and sellers across the UK, in more challenging mortgage rate times, it’s the affordable areas that are proving to be the biggest draw for buyers.
‘Sales activity is up across the board, with the strongest growth in sales taking place in areas with more affordable house prices, such as Yorkshire and the Humber (11%) and the North West (13%),’ says Donnell.
Meanwhile, the strongest growth in new sellers listing homes can be seen in the South West (28%) and North East (26%).
Over in the capital, the supply of homes for sale is just 8% higher, which means house prices are rebounding faster here than other parts of the UK, as more buyers compete for properties.
Asking price discounts narrow as house prices hold steady
While it remains a buyers’ market right now, buyers should know that the discounts being offered by sellers are starting to get smaller.
Towards the end of 2023, nearly half of sellers were offering discounts of 5% or more. That figure has now shrunk to two-fifths.
Similarly, the average discount offered at the end of last year was 4.5%, (£14,250). Today, it’s 3.9% (£10,000).
There continues to be a north/south divide in house prices, with homes in the south continuing to register house price falls as homes in the north see house price growth.
But all areas are recording higher annual price inflation than six months ago, as sales volumes recover and pricing levels firm.
So while there’s still room to negotiate, house prices are starting to hold steady in 2024 and we don’t expect to see a further fall in property prices this year.
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