What will happen to UK mortgage rates 2023? Interest rates forecast, what are current rates, will they go down

With the cost of living crisis squeezing personal finances, here’s the latest advice on what to do if your mortgage fixed-rate deal is coming to an end

Mortgage rates rocketed towards the end of 2022. Households have had to pay hundreds of pounds extra per month to remortgage their property, while many first-time buyers have been priced out of getting onto the housing ladder.

Soaring inflation forced the Bank of England to gradually raise interest rates throughout the course of last year, but the Liz Truss administration’s sudden tax-cutting and public spending spree led to fears the UK’s central bank would have to significantly hike them as the value of the pound nosedived. Lenders subsequently factored in huge mortgage rate increases.

Truss’s u-turns and swift removal from office improved matters. But the Bank of England still introduced its single-largest base rate rise since the 1980s in November 2022, and has since added another two 0.5 percentage point hikes - the latest occuring on Thursday (2 February).

With record high interest rates and the UK on course for a recession in 2023, house prices have started to fall - albeit from all-time highs in 2022. So, it might seem like a good time to get on the housing ladder for some, or an anxious time for others - particularly mortgage payers whose current deals are coming to an end.

But what is the latest advice on mortgages - and can we expect them to go down in 2023?

According to the ONS, 1.4 million will see their fixed-rate deal expire in 2023 (image: Adobe)

What are current UK mortgage rates?

In the wake of Kwasi Kwarteng’s disastrous mini budget in September 2022, mortgage rates rocketed to more than 6%, having been around 2% just a year earlier. They have been gradually falling ever since, with rates now between 4.75% and 5% for short-term fixes (two or three-year deals) and longer-term deals (five to 10-year fixes) lying closer to 4.5%.

Standard variable rate (SVR) mortgages - the deals you automatically move to if your fix expires - are generally sitting between 6% and 7%, according to UK-wide broker L&C, with the latest interest rates decision likely to add £30 to monthly repayments. It means that someone moving off a 2% fix, with a £100,000 mortgage set to be repaid over 25 years, would see their monthly repayments increase by £250 to almost £675 if they were paying the lower-end SVR rates, according to NationalWorld analysis of recent Office for National Statistics research.

Meanwhile, average monthly tracker mortgages are likely to go up by around £50 to £382 per month – or £4,600 a year - in the immediate wake of the latest base rate hike, according to UK Finance. The ONS recently revealed that more than 1.4 million households will be coming off fixed-rate deals in 2023, and that the majority of them were currently on fixes of around 2%.

How much extra they will have to pay depends on whether mortgage rates come down throughout the year and personal circumstances. But their new level of monthly repayments is likely to come as a shock.

Will mortgage rates go down?

After its latest interest rates decision in December, the Bank of England said a market survey it had conducted suggested interest rates were forecast to peak somewhere between 4.25% and 4.75% by the middle of 2023, but would remain around this level for the rest of 2023. The peak now appears as if it could be softer, with market analysts predicting 4.5% will be the high watermark.

Given the interest rate the UK’s central bank sets directly impacts how much it costs to borrow money across the UK economy, it means we may well have seen the worst of mortgage rate rises. But, while they are likely to continue coming down from the highs seen last autumn, they will still be much higher than they were before rates started climbing in October 2021.

For first time buyers, Nationwide Building Society has warned affordability is still a major problem partly as a result of higher mortgage costs. This point was echoed in research by rival lender Halifax, which found people are having to co-habit in order to secure their first home.

Uncertainty is engulfing the housing market (image: AFP/Getty Images)

In light of the Bank of England’s latest interest rates hike, mortgage expert at Uswitch Kellie Steed said it would “not necessarily” equate to further mortgage rate rises. “Tracker rate mortgages directly follow the base rate, and customers can therefore expect their mortgage interest rate to go up in line with the increase. Fixed-rate mortgage interest rates, on the other hand, have been in gradual decline for the past couple of months and this further increase to the base rate is not expected to impact this trend.

“Mortgage lenders tend to adjust their rates ahead of time to account for worst-case-scenario increases. The knock-on impact of base rate increases on most mortgage rates is, therefore, not as formulaic as seen in tracker-rates. If you’re on a standard variable rate (SVR), or discount rate set on your lender’s SVR, it’s less obvious whether this additional hike in the base rate will directly affect rates, although the average SVR at the current time mirror’s the base rate in being at its highest rate since 2008, 6.64%.”

Echoing Ms Steed was Tim Bannister, property expert at Rightmove, who said he expected to see fixed-rates continue to “edge downwards” over the first half of 2023. He said: “We’re still seeing buyer demand higher than the last ‘normal’ housing market of 2019, indicating that people have the confidence to get on with their moves and if fixed deals do head further downwards this may encourage people further.”

The cost of living has hampered the UK property market (image: PA)

Speaking to NationalWorld in January, UK-wide mortgage broker John Charcol said the expectation is that mortgage rates will continue to decline as the year goes on, before stabilising. It said deals as low as 3.5% could be seen from mid-2023. In its latest research, Zoopla said it expected deals to remain in the 4% to 5% range throughout the year.

What do seem set to go down are house prices, with Santander forecasting on 2 February that they will fall by around 10% in 2023, a figure major real estate services firm Savills has also quoted. Frances McDonald, a research analyst at Savills said: ““Throughout this year the market will be dominated by needs-based buyers and those who are less reliant on mortgage debt.” She added that properties could see a 17% resurgence in value in 2024 as economic conditions improve.

What should you do if you’re remortgaging?

Given these rates are still much higher than what they were from the 2010s through to 2021, it is likely to be an anxious time for those whose fixes are set to come to an end this year. With the wider cost of living crisis hitting household finances, and set to continue throughout 2023, the prospect of higher monthly repayments may be of major concern.

Nick Mendes, mortgage technical manager at John Charcol, told NationalWorld there are several options for people in this situation. Here is a breakdown of the advice he gave us on how to proceed.

  • Hedge your bets

Many lenders now allow customers to lock in a new fixed rate deal six months in advance. By doing so, you can cover yourself against market movements.

“If you have six months or so left until you remortgage, you can fix a deal that means you’ll go straight onto your new rate as soon as your current fix ends,” Nick Mendes said. “If rates were to continue to decrease in those six months, then you could look at switching to a new, lower rate in that time with the lender. If rates were to continue increasing in those six months, then you will have secured a lower rate early on. It’s a win either way.”

Homeowners are being told to act now on their mortgages (image: Getty Images)

According to Mr Mendes, another, slightly riskier option is to allow your fix to lapse and temporarily move onto an SVR or a discounted tracker that has no early repayment charges. This may “save money in the long-term” if fixed rates “decline further,” he said.

  • Overpay while you’re still on your current rate

If your current fix is at a cheaper rate than what you’re likely to pay when you remortgage, it could be worth overpaying over the months you have left to reduce your loan-to-value (LTV) ratio (the amount of loan you have left to pay compared to the value of your home).

Mr Mendes said: “Each year, fixed rate products allow you to make overpayments of up to 10% of the outstanding balance, so you can pay off your mortgage quicker. You can typically do this by increasing your monthly direct debit or making lump sum payments.

“Many homeowners are currently on fixed rates lower than the rates on the market today. Therefore, when it becomes time to remortgage, you’re likely going to be moving onto a higher rate regardless of the LTV of your property.

There are several ways you can boost your mortgage (image: AFP/Getty Images)

“Utilising your allowance while on a low rate can be a more cost-effective way of significantly reducing your mortgage balance than making overpayments when the percentage is higher. You can calculate the impact of mortgage overpayments using our free calculator.”

  • Look at extending your mortgage term

By lengthening the amount of time you will pay your mortgage back over, you can reduce your monthly repayments.

“Lower monthly repayments might be useful as a short term cost-cutting solution, but you want to ensure that you review the term each time your fixed rate comes to an end,” said Mr Mendes.

“Doing this also means there will be an increase in the overall cost of borrowing as you’ll be paying interest on a mortgage that’s reducing at a slower rate for a longer period of time.It may not be possible for those nearing the end of their working career to extend their term, or they may have to look at alternative later life lending term options – e.g. RIO (retirement interest-only).”

What to do if you’re struggling with cost of living

If a rise in monthly mortgage repayments could push your personal finances into the red, Nick Mendes gave four key bits of advice:

  • Speak with your mortgage lender as soon as an issue arises: being open with the lender early on will allow them to propose a solution to support you. It also avoids risk and costs from spiralling out of control. Solutions could involve changing monthly repayments for a short period, a mortgage holiday, or extending the term to lower your monthly payments.
  • Review your budget: prioritise what is important, speak with any other secured and unsecured lenders you are borrowing from as each one will be able to support you.
  • Review your protection insurance: if your circumstances have changed due to health or work conditions, you may find your policy covers you.
  • Speak to a mortgage broker: a whole of market broker will be able to ensure you get the right advice.