UK mortgage rate forecast for February 2025
Uncertainty surrounds the future direction of mortgage rates, even though a cut in the base rate of interest is widely expected in February.
While the average cost of fixed-rate mortgages headed lower in early January, rates began to rise midway through the month. This was despite a surprise drop in inflation that appeared to clear the way for a cut in the base rate when policymakers at the Bank of England next meet on 6 February.
“It is pretty tough to say exactly what will happen to mortgage rates at the moment,” said Aaron Strutt, product and communications director at mortgage broker Trinity Financial. “There has been a mixture of fixed-rate price increases and reductions and market volatility over the last few weeks. I personally think rates will come down this year, but we are susceptible to many factors outside of our control.”
Fixed mortgage rates fall and then rise
In the first two weeks of the year, Halifax, HSBC, first direct, Leeds Building Society, and several smaller building societies all lowered selected fixed rates. The largest reductions were often aimed at first-time buyers and those remortgaging.
However, from the middle of January, rate increases became the norm. Major lenders such as Barclays, Halifax, Nationwide, TSB and Virgin Money all raised some fixed rates, as did Leeds Building Society, which had cut rates only a few weeks before.
It all means typical fixed rates are set to end the month pretty much where they began. The average two-year fixed mortgage rate, which stood at 5.06% at the start of January, and dropped to 4.97% by the middle of the month, now stands at 5.02%. The average five-year fixed-rate currently stands at 4.80%, precisely where it started the month, having dropped to 4.75% in between. Importantly, some more attractive fixed-rate deals are still available.
“Many of the bigger banks and building societies have not pushed up the cost of their most competitively priced rates,” says Strutt. “This means some mortgages, mainly for those with larger deposits, are still priced at just over 4%. Mortgage rates are susceptible to market confidence and pricing pressures. The cost of funding mortgages increased significantly a few weeks ago, but these rises have subsided, and it looks like prices may come down or at least stabilise over the coming days.”
Base rate cut expected in February
Sentiment surrounding the base rate of interest continues to have a large sway over how mortgage rates are priced.
Following the latest economic data, investors and many commentators believe the Bank of England’s Monetary Policy Committee (MPC) could lower the base rate at the first opportunity it has this year.
Key to the optimism is a lower-than-expected December inflation reading. The headline consumer prices index dropped to 2.5%, down from 2.6%, which was small, but defied the forecasts it would remain unchanged. Lower-than-expected economic growth in November, weak retail sales in December, and a cooling jobs market have also strengthened the calls for a rate cut to boost the economy.
As a result, investors believe there is around an 80% chance of the base rate being lowered to 4.5% from 4.75% on 6 February. This compares with a 60% chance before the inflation announcement.
“At the moment it looks nailed on that the Bank of England will cut rates by a quarter of a percentage point at the February meeting,” said Danni Hewson, head of financial analysis at investment platform AJ Bell. “After all, three of nine MPC members voted to cut in December. But that’s already pretty much been priced in by lenders so don’t expect to see a flurry of lower deals coming to the market. The recent jitters over government borrowing and rising gilt yields have taken their toll on swap rates which is why some lenders have been increasing rates in the last few days, even after cooler than expected inflation data and increased market expectation of a February cut to the base rate.”
Tracker borrowers eye cheaper payments
If a cut happens, it should bring some welcome relief for borrowers with a tracker mortgage or paying a standard variable rate. With the rates on both types of mortgage tending to follow the direction of the base rate, lower monthly repayments should follow.
Looking further ahead, the inflation data led some to cautiously suggest that more rate cuts may be on the cards for 2025 than had been recently anticipated. In last month’s forecast, expectations centred around there being two cuts this year; now, some are suggesting there is the potential for three or maybe more.
However, doubts remain over whether inflation is fully under control. The reading has been above the Bank of England’s 2% target for three months in a row and it is feared the rate could rise, or at least stay high, in the coming months. To this end, wage growth rose again in November, and the increase in employers’ national insurance contributions lays in wait in April, both of which could bring inflationary pressures. More uncertainty also comes with President Trump’s return to the White House.
“Predicting where mortgage rates are likely to go over the coming months is particularly tricky as two opposing forces collide,” says Hewson. “On the one hand the economy is looking stagnant, and unemployment is rising but on the other inflation is still stubbornly high and expected to rise further. Two of the big X-factors are how much of the increased labour costs businesses will push through to customers in coming months and what Donald Trump will do to global trade if he pushes through promised tariffs. For wannabe house buyers and those with fixed rates coming to an end, it means more months of uncertainty and volatility.”
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