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UK mortgage rate forecast for January 2025
There is concern that recent mortgage rate reductions may be short-lived, amid expectations the base rate of interest will stay higher for longer in 2025.
With the cost of fixed-rate mortgages generally rising since mid-October, December saw the welcome return of mortgage lenders gradually lowering rates.
However, following a few weeks of downward mortgage rate movement, inflation was confirmed to have increased for the second month in a row. While the rise was expected, it effectively rubber-stamped the widely anticipated December hold in the base rate of interest, raising questions over what lies ahead.
“For those looking for a fixed rate deal, the fact the market is pricing in fewer cuts between now and the end of 2025 means we’re likely to see mortgage rates rise slightly from here,” said Sarah Coles, head of personal finance at investment platform Hargreaves Lansdown. “Mortgage rates have fluctuated over the past month, as the market struggled to make its mind up about the path of future rate cuts. With so much uncertainty around, it can be a good idea for anyone with a looming remortgage to secure a rate now. If rates rise in the interim, they’ll have locked in a cheaper deal, but if they fall, they can shop around for something cheaper.”
Fixed mortgage rates edge lower
Mortgage borrowers can be forgiven for feeling frustrated if the recent cuts in mortgage rates stall as a result. In the first few weeks of December, several lenders, including Barclays, Halifax, HSBC, NatWest, Santander, TSB and Virgin Money, lowered the rates on selected fixed-rate deals.
The net result is a drop in the average five-year fixed mortgage rate to 4.81% on 19 December, down from 4.86% at the start of the month. The average two-year fixed rate fell from 5.09% to 5.06%. The reductions may be small, but rates have been heading down, and not up as seen across most of the previous two months. The late flurry of cuts also means the year is almost certain to end with better fixed rates on offer than when it began.
That said, it should be noted that some lenders continued to raise certain rates during the first half of December. Generally, the increases were seen on mortgages aimed at first-time buyers and those with smaller deposits or less equity in their property. In other words, those homebuyers that lenders consider to pose the greatest risk to them as borrowers. Similar to the uncertainty that ran through last month’s forecast, whether rate rises once again become the dominant trend for all is the great unknown.
“This hold of the base rate will do little to make change in the mortgage rates currently available,” says Justin Moy, managing director of independent broker EHF Mortgages. “The expectation of a base rate hold was almost unanimous across the financial markets, and Swap rates had priced for that decision too. It’s unlikely we will see any wholesale mortgage rate cuts early in 2025, it’s more about competitive pressures within the High Street and the clamber to start the year well as lenders.”
Tracker mortgage rate frustration
Sadly for borrowers with tracker mortgages or paying their lender’s standard variable rate, there are two potential sources of frustration as the year ends. First, the raft of base rate reductions that were expected at the start of 2024 have not materialised – instead, there have been just two cuts, in August and November. And second, it already seems likely there will be fewer cuts in 2025 than were recently forecast.
Indeed, on 4 December, the suggestion from the Bank of England governor, Andrew Bailey, was that there may be four cuts to the base rate in the coming year. Two weeks, and some key economic announcements later, the markets are anticipating half as many.
“As inflationary forces gather, the Bank of England isn’t going to be gung-ho about cutting interest rates,” said Laith Khalaf, head of investment analysis at investment platform AJ Bell. “The market is still pricing in two further rate cuts next year, but this is a big climb down in the course of just twelve months. At the beginning of 2024, the market was expecting no fewer than six interest rate cuts in the course of the year; we got two.”
February base rate cut a possibility
Much has happened to arrive at this point. First, a surprise contraction in the UK economy led the most optimistic to suggest a December rate cut may be on the cards. However, sentiment swayed back the other way when it was revealed that wages rose faster than expected in October, bringing the threat of more persistent inflationary pressures. Next came confirmation that inflation had increased to an eight-month high in November. The rise in the headline consumer prices index to 2.6% was in line with forecasts, but effectively ended the already slim hopes of a third base rate cut to end the year.
The Bank of England confirmed as much the following day, with the base rate kept on hold at 4.75%. That three of the nine policymakers voted to lower rates has led some commentators to suggest a cut is possible at the next rate-setting meeting in February. Whether a flagging UK economy needs a boost at that time seems key.
“I expect mortgage lenders to be quick out of the blocks in January and to continue to price as sharply as possible,” said David Hollingworth, associate director at broker L&C Mortgages, “but the Bank has been consistent in its tone, suggesting the likely pace of rate cutting will be gradual.”
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