Will mortgage rates decrease in 2024?
Mortgage rates are not expected to decline further this year, but increasing wages are likely to enhance affordability for buyers as home prices remain stable.
Buyers are closely monitoring the Bank of England’s latest Base Rate announcements more than ever before.
Despite the recent, highly anticipated drop from 5.25% to 5%, mortgage rates are projected to stay around 4-4.5% for the rest of the year.
However, mortgage rates have decreased since June of last year, when the average five-year fixed-rate mortgage with a 75% loan-to-value ratio peaked at 5.8%, significantly increasing monthly repayments for buyers and homeowners.
Today, the average rate for the same mortgage has dropped to 4.4%.
Here’s how this reduction impacts monthly mortgage payments.
Mortgage rates unlikely to fall below 4% in 2024
Buyers hoping for significantly lower mortgage rates in 2024 may be disappointed, as rates are not expected to drop much further this year, even if inflation and the Base Rate decrease.
Richard Donnell, our Executive Director of Research, explains: "Expectations of lower interest rates are already factored into current fixed-rate mortgages.
"While lower interest rates could lead to modest reductions in mortgage rates, the extent of the decline will depend on how much the money markets anticipate base rates to fall.
"Economists predict base rates could drop to 3.5% by the end of 2025, suggesting mortgage rates will likely remain around the 4% range."
Why are mortgage rates decreasing?
Mortgage rates started to decline in the latter half of 2023, as inflation fell from 6.3% in September to 4.2% by December.
Although inflation hit its 2% target in June this year, it has since slightly increased to 2.2%.
Meanwhile, the Bank of England held the base rate steady at 5.25% for seven consecutive meetings before lowering it to 5% in August.
By the end of 2025, the base rate is expected to drop to 3.5%.
The base rate affects the interest rates commercial banks charge for borrowing and pay on savings, as it represents the rate the Bank of England pays to banks holding deposits with them.
What factors influence interest rates?
Inflation has been the primary driver of high interest rates in the UK over the past 30 months. A sudden increase in demand or a decrease in supply can lead to rising inflation.
In late 2021, the Bank of England began raising the base rate to curb inflation and slow price increases for essential items such as food, fuel, gas, and electricity.
This strategy has been effective, with inflation now close to the 2% target. However, the Bank must maintain a higher base rate to prevent inflation from rising again.
Global events like wars, pandemics, or disruptions to key transport routes, such as the Suez Canal, can also affect inflation by disrupting the flow of goods worldwide.
How buyer affordability could improve in 2024
Buyer affordability is expected to improve this year as wages rise while house prices remain stable—a trend that’s already boosting buyer confidence.
“Rising household disposable incomes will be the key factor in improving housing affordability in 2024,” says Richard Donnell.
Disposable incomes are forecasted to grow by 3.5% throughout the year, while house prices are likely to stay relatively flat.
In fact, the housing market is already gaining momentum, with the number of sales agreed up 9% year-on-year. This is also encouraging more sellers to list their properties, increasing options for buyers.
More options for buyers in 2024
The number of homes for sale is at its highest level in six years, providing buyers with more options and driving more sales.
On average, estate agents now have 33 properties listed—16% more than a year ago.
This increased supply benefits both sellers and buyers, as many sellers are also looking to purchase.
More choices for buyers also create more flexibility in negotiating prices.
“A greater supply of homes will help keep price increases in check,” says Richard Donnell. “Buyers have more options and negotiating power, particularly for properties that aren’t generating swift interest.’
Affordable areas remain popular with buyers
While buyer and seller activity is increasing across the UK, more affordable regions are attracting the most interest during challenging mortgage rate times.
“Sales are rising across the board, with the strongest growth in areas with lower house prices, such as Yorkshire and the Humber (11%) and the North West (13%),” says Richard Donnell.
At the same time, new seller listings have surged in the South West (28%) and North East (26%).
In contrast, London’s supply of homes for sale is up just 8%, leading to a faster rebound in house prices as buyers compete for properties.