Tim Leonard
Adam French
UK mortgage rate forecast for August 2024
There is hope that more mortgage rate cuts may be on the way after competition among lenders ramped up in July. With the base rate of interest expected to fall in either August or September, mortgage providers rediscovered their appetite to actively compete for the attention of borrowers.
The net result is that the typical cost of fixed-rate mortgages has been falling for the past six weeks. Meanwhile, a fixed-rate mortgage priced below 4% has arrived on the market for the first time since February.
“The mortgage market is looking more positive, especially with the amount of pricing improvements we are seeing at the moment,” Aaron Strutt, product and communications director at mortgage broker Trinity Financial, told NerdWallet UK.
“Nationwide Building Society is offering the first 3.99% five-year fix we have seen in months and Barclays has just launched the cheapest two-year fix at 4.39%. It is not unreasonable to think we could get more sub-4% fixes soon, especially with the ongoing mortgage price war.”
Fixed-rate mortgages see falls
Altogether everything appears to spell better news for borrowers looking to take out a mortgage soon.
Rightmove data shows the average five-year fixed mortgage rate stood at 4.88% on 24 July, down from 5.04% in the middle of June. On two-year fixed-rate mortgages, the average rate of 5.27% has dropped from 5.44% at the same time. Over both terms, typical rates are lower than where they started the year.
The main takeaway from last month’s forecast was that the cost of mortgages would fall as the base rate cut nears, and that has happened. However, given the scale of the reductions that have been made already, it is unclear whether the pace of rate reductions can continue or if it may slow.
Sarah Coles, head of personal finance at investment platform Hargreaves Lansdown, expects the base rate to fall in September if it’s left unchanged in August, but also makes the point that the market is still pricing in two or three cuts by December.
“These cuts have already been priced into fixed-rate markets, which is why we saw a spate of mortgage rate cuts in July,” Coles told NerdWallet UK. “These haven’t been seismic movements, but they are at least heading in the right direction. It means we’re not expecting a spectacular reaction to the initial Bank of England cut – whenever it comes. We can expect average mortgage rates to drift slowly south throughout 2024, especially if hopes for further rate cuts intensify.”
Base rate timing still in the balance
The foundations for the base rate to start falling were set once it was confirmed that inflation had returned to its target level of 2% in May. Whether the Bank would make its move in the summer or wait until the autumn has been the big question ever since. Understandably, investors and commentators have been poring over each snippet of economic news and policymaker mumblings for clues.
Initially, an earlier cut had seemed likely. However, following the latest round of inflation data for June, investors reacted by scaling back bets on a cut happening in August. While headline inflation held steady at 2%, the closely watched reading on services inflation remained higher than was expected. For some economists, the latest wage growth data, announced a day later, also tipped the balance towards a September reduction.
Ultimately, it is the nine members of the Bank’s Monetary Policy Committee who decide what happens and when. And before either set of data was revealed, two policymakers had already suggested they were unlikely to vote for a cut in August.
Both were among the majority at the June rate-setting meeting when seven committee members had voted to keep the rate on hold at 5.25%, outweighing two who favoured a 0.25% reduction.
“The base rate decision [for August] hangs in the balance,” said Coles. “The fact that inflation stuck at 2%, and unemployment has continued to tick up, is balanced against a number of possible signs that the fight against inflation isn’t over just yet. Core inflation and services inflation have been resolutely sticky. In the case of services, this owes much to higher wage costs, which continue to rise significantly ahead of inflation. At the same time, signs of strength in the economy could increase pressure to keep rates where they are for another month.”
Some SVRs already falling
When a base rate cut does arrive, it will be the first since March 2020. For borrowers with tracker mortgages or paying their lender’s standard variable rate (SVR), both of which typically follow the direction of the base rate, it can’t come a minute too soon.
The average standard variable rate has increased from 4.48% on 1 July 2020 to 8.17% on 1 July this year, according to Moneyfacts data. For a £200,000 mortgage taken over a 25-year term, it means a borrower on the average standard variable rate is currently paying £457 more each month towards their mortgage compared with four years ago.
The encouraging news is that some lenders – including Virgin Money and Clydesdale Bank – have already lowered their SVRs in anticipation of the base rate being cut. While SVRs tend to move as the base rate moves, lenders have discretion over the timing and extent of any change. However, it’s likely most lenders will follow suit once the base rate finally falls.
“Many people expect mortgage rates to get cheaper over the coming months and into next year,” said Strutt. “Price reductions seem more likely to happen if the Bank of England’s Monetary Policy Committee acts to lower the base rate although there generally seems to be an excuse for them to not reduce it. We are not expecting to get a base rate cut in August.”
Image source: Getty Images
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