What’s happening to UK mortgage rates? Average and best interest rates - are they going down?

UK mortgage rates have rocketed over the last 12 months. Liz Truss’s premiership provided the first shock almost a year ago, with a combination of soaring inflation rates and market jitters over her policies driving rates up.

This was followed by an even worse spike throughout the spring and summer, which came about as a result of consecutive months of worse-than-expected inflation data. With markets losing faith in Rishi Sunak’s ability to deliver on his pledges and the Bank of England’s strategy, homeowner costs soared.

The situation has improved somewhat in recent weeks, although rates remain close to 15-year highs. The mortgage market has become less volatile following two months of falling inflation. But more pain is likely to be on the horizon for some mortgage holders, as the Bank of England is widely expected to hike its base rate once again in September.

If you’re due to remortgage in the coming weeks and months, you’re likely to find your monthly repayments will rocket. For around one million households who are due to remortgage between now and 2026, monthly costs are expected to rise by at least £500 according to Bank of England estimates.

So, what rates can you expect to see if you’re currently seeking out a mortgage deal - and how should you approach the situation?

What are current UK mortgage rates?

In the wake of the Mini Budget in September 2022, mortgage rates rocketed to more than 6%, having been around 2% just a year earlier. While repayment costs fell away over the following six months, they exceeded their Liz Truss era highs as a result of worse-than-expected inflation data.

The rate of price rises in the economy unexpectedly climbed in February, with the following months seeing smaller falls in inflation than had been forecast. It was not until June’s set of inflation statistics that a significant slowing in cost of living pressure was recorded. The overall situation has led to soaring mortgage rates as key loan pricing markers, like swap rates, have grown increasingly volatile - although things have eased somewhat in August.

NationalWorld has put together a summary of the best deals on the market for different mortgage product types. But be aware that the following figures are likely to change between now and our next update, and therefore may not be available by the time you get to the offer stage of the mortgage process.

As of Tuesday (29 August), the best remortgage rates (where the loan to value (LTV) ratio is 60%) were sitting at 5.79% and 5.59% for shorter-term fixes (two or three-year deals) and longer-term deals (five to 10-year fixes) were lying at 5.23% and 4.91%, according to MoneyFactsCompare. These are not far below the 15-year highs recorded earlier this year, and mark the continued unusual trend of longer-term fixes being cheaper.

Despite better inflation figures, average rates have remained relatively static. According to Uswitch, the average two-year rate (75% LTV) - the length of fix that most prospective borrowers will currently be looking at - was sitting at 6.75%. For a five-year fixed rate, it was 6.22%.

For first-time buyers (90% LTV and above) average rates have remained at 6.54%. MoneyFactsCompare said the best rates for those seeking out their first home on short-term fixes are looking at rates of 5.86% and 5.79% for two or three-year deals. The best longer-term deal (five years) is sitting at 5.46%.

For standard variable rate (SVR) mortgages - the deals you automatically move to if your fix expires - rates of around 8% are the norm, with some having jumped closer to 10%, according to UK-wide broker L&C. Lender trade body UK Finance said the August Bank of England interest rates decision was likely to have added £15.14 to monthly repayments (£182 a year), bringing the overall hike since December 2021 to almost £311.90 a month, or £3,742.80 per year. People are likely to be on this kind of product at present in the hope that rates will soon come down enough for them to consider a fix.

Meanwhile, those on tracker rates - mortgages which rise and fall depending on the UK central bank’s interest rates decision - have seen their monthly repayments go up by an average of £23.71 per month (£285 a year) since the latest decision. While this may not sound like much, the organisation calculates that monthly repayments are now £488.50 per month (£5,862 a year) higher than in December 2021. As with SVRs, trackers are proving to be attractive at the moment as homeowners gamble on a fall in fixed-term deals.

Will mortgage rates go down?

There is still a bit of uncertainty about how much higher interest rates - a key factor in setting mortgage rates - will go. Any bad months for inflation data could see mortgage rates start rising again.

Technical manager at mortgage broker John Charcol, Nick Mendes, said of the situation: “While it’s difficult to pre-empt market reaction, [better inflation] will hopefully have a positive impact on future market forecasts, and a calming to the recent volatility in fixed rates. It will take a few months before we see any substantial decreases in fixed rate pricing.”

His view was backed by economic analysis consultancy Capital Economics, which said it expects mortgage rates will “plateau rather than fall”. Its senior property economist Andrew Wishart said: “It is important not to get too carried away by one data release. While getting inflation back down to 5% may not be too troublesome as energy and food price inflation eases, pay settlements averaging 6% year-on-year mean [sticky inflation] will take longer to snuff out.

“That’s why we think the Bank of England will raise the Bank Rate to a peak of 5.5% by September and keep it there until next summer. If that’s right, a significant further drop in swap rates is unlikely until next year.” Mr Wishart added he did not expect average mortgage rates to begin to fall until after the middle of 2024.

What should you do if you’re remortgaging?

In the first instance, NationalWorld recommends speaking to your lender and a mortgage broker to see what rate you can remortgage at. A broker will be able to provide the best advice on what options will suit you best.

Advice firm the Mortgage Advice Bureau has made several other recommendations for people thinking about their next steps. Its deputy CEO Ben Thompson said: “Those looking to remortgage are faced with a challenging and volatile market. Nevertheless, there are some actionable steps that homeowners coming towards the end of their current fixed-rate deals can, and almost certainly should take.

“Finding out exactly when your current mortgage rate is set to end, your outstanding balance, and how much you currently pay each month is key. From here, you can research what rates are currently available, and what your options might be. [Also] it may feel tough right now, but if you can, review your finances and see if you can make any additional savings in anticipation that your repayments will go up.

“With interest rates likely to go up before they come down, consider locking in a new rate with your lender early. Many lenders will allow you to move onto a new rate three or six months before the official end of your current rate. However, be aware that if mortgage rates do come down, you might find yourself on a higher rate than that available on the market. The important thing here is to get the facts from your lender, so you know what options are available to you.”

Mr Thompson added that checking your credit score and chatting with your lender to see if they have any exclusive deals for loyal customers are also ways of making sure you’ll be in the best position possible to access the best rates.

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, John Charcol’s Nick Mendes, gave NationalWorld 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.