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UK mortgage rate forecast for December 2024
An air of uncertainty hangs over what might happen to mortgage rates next. Despite a drop in the base rate of interest in November, the cost of fixed mortgage rates has surged higher following the concern that the base rate may not fall as fast as previously thought.
In the near term, hopes of a December rate cut look to have been dashed by several factors, including higher-than-expected inflation in October. This came on top of more expensive funding costs already being felt by mortgage lenders, due to the Autumn budget and the outcome of the US election.
“Markets are being cautious and that’s having a knock on to lenders, something which many mortgage seekers might be finding counterintuitive,” Danni Hewson, head of financial analysis at investment platform AJ Bell, told NerdWallet UK. “In the days after the base rate cut many lenders actually increased their fixed rates as money markets priced in just two, or at the outside three, quarter percent cuts to the base rate next year.”
Fixed mortgage rates see large rises
Every major mortgage lender, and many others, raised the cost of at least some of their fixed-rate mortgages in the past month. Some hiked rates more than once.
As a result, the best five-year fixed-rate mortgage available stood at 4.14% on 21 November, notably higher than the market-leading rate of 3.84% on offer at the start of the month. The lowest available two-year fixed rate leapt from 3.96% to 4.22% over the same period.
What may seem strange is that the biggest increases came shortly after the Bank of England lowered the base rate of interest for the second time this year, from 5% to 4.75%.
In the week following the announcement on 7 November, the average five-year fixed mortgage rate jumped from 4.70% to 4.83%, while a similarly sharp rise was seen on average two-year rates, from 4.95% to 5.07%. By some distance, both were the largest week-on-week increases seen over either term this year.
Inflationary pressures take a toll
Concern that a fresh bout of upward inflationary pressure may be on the way is likely to be the main reason lenders have been increasing rates. The base rate is the main lever used by the Bank of England to try and keep inflation under control, and lenders account for base rate expectations when setting fixed mortgage rates. Unfortunately, there have been three events in the past few weeks that have stoked this new round of inflationary fears.
First, there was the Autumn budget, in which the chancellor, Rachel Reeves, announced significant rises in Government borrowing and public spending. Among the main headlines were a rise in employer national insurance contributions and an increase in the minimum wage. Both policies have the potential to be inflationary if businesses pass these additional costs onto consumers in the form of higher prices.
Second, the US election has led to the imminent return of Donald Trump to the White House. While the President-elect secured a second term partly because of a promise to fight inflation, many economists, and the financial markets, believe his policies could have the opposite effect, and see prices increase, both in the US and globally.
And third, there was the publication of the latest inflation data itself, which showed that consumer prices index (CPI) inflation had increased to 2.3% in October, from 1.7% in September. While a rise had been anticipated, the reading was higher than had been expected.
Base rate cuts on hold
The net result is that markets, and mortgage lenders, believe interest rates may now need to stay higher for longer to counter any such inflationary pressures. Just a month ago, following September’s inflation data, our previous forecast found the odds had shortened on the likelihood of the base rate being lowered in December, as well as November. Now, following recent events, market expectations set the probability of a further cut this year at just 16%.
“It’s highly unlikely Bank of England rate setters will follow through with a third cut for 2024, a cut which just a couple of months ago had looked nailed on,” said Hewson. “There are too many variables at play which could have a marked impact on inflation over the coming months and with the headline CPI rate back over target, Monetary Policy Committee members are likely to want to play the next few hands very carefully. Tax hikes and spending increases announced in the recent budget, along with the potential for a US tariff sparked trade war, are tempering expectations of a series of rate cuts for 2025.”
Hope rate cuts may soon resume
For borrowers with tracker mortgages and paying a standard variable rate, both of which typically follow the base rate, this latest turn of events will be frustrating. However, it shouldn’t be overlooked that the next moves in the rate are still expected to be down, rather than up.
At the same time, this offers hope that the recent rises in fixed mortgage rates could turn out to be a temporary blip, rather than the beginning of a more permanent and prolonged upward trend. Notably, the pace of the rate rises has already eased considerably, and some lenders have made a few modest cuts. Experts believe more rates could start heading lower again in the new year.
“The scale of mortgage rate increases has slowed over the last week following the fixed rate price hikes brought on by the Budget and concerns about rising inflation,” Aaron Strutt, product and communications director at mortgage broker Trinity Financial, told NerdWallet UK. “It seems unlikely the base rate will come down in December because inflation has ticked up. But some of the bigger banks are still predicting multiple base rate reductions next year, which doesn’t sound unreasonable, so there is a fair chance that fixed rates will get cheaper.”
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