Mortgage Rates in the UK: What is the Outlook for Rates in 2024?
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by Property Investments UK
The Property Investments UK editorial team have been researching and writing about the UK's property market for more than a decade.
After years of ultra-low rates, mortgage rates in the UK have been on the rise for some time now. In this article, we will look at exactly what mortgage rates are, how mortgage rates work, and offer some forecasts for mortgage rates in the UK for 2024.
What the Mortgage Rate Is
The mortgage rate is the rate of interest charged on a loan given to buy property.
Mortgage rates are normally quoted as an APRC or annual percentage rate of charge. This is the overall rate of interest payable on the mortgage, considering the interest rate, any introductory rate and any fees for taking the mortgage out.
The APRC allows you to compare different mortgage rates to see which is cheapest.
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Mortgage Rates Explained
The mortgage rate and the interest rate are not the same thing. There are different kinds of interest rates.
What is the Bank Rate?
The bank rate is the rate of interest set by the Bank of England’s Monetary Policy Committee or MPC. According to the Bank of England, the bank rate determines the interest rate they pay to commercial banks that hold money with them.
The bank rate is sometimes known as the base rate. The bank rate and base rate are the same thing.
The bank rate is also used by the Bank of England as a tool to regulate inflation to try and achieve the official government target rate of 2% or less. It tends to be the case that when inflation rises, as it has done of late, the Bank of England sets higher interest rates to try and reduce it, and vice versa.
What is the Mortgage Rate?
Mortgage rate is the rate of interest mortgage lenders like banks and building societies charge on their mortgages. The mortgage rate is set by the banks and building societies themselves, not the Bank of England.
Interest rate can mean either the bank rate, base rate or mortgage rate or indeed the rate of interest charged on any kind of lending including mortgages, loans and credit cards.
Is the Mortgage Rate Linked to the Interest Rate?
Mortgage rates are linked to the Bank of England’s base rate or bank rate – but only very loosely. We will explain how this link works below.
How Banks Set Mortgage Rates
The way in which lenders set mortgage rates is pretty complex. Every bank or building society that offers mortgages has its own way of setting its mortgage rate or rates.
Factors lenders take into account when setting the mortgage rate include:
The bank rate: Mortgage rates are only loosely linked to the current bank rate because lenders must consider likely bank rates across the lifetime of the loan. Currently, the cheapest fixed mortgage interest rates are close to bank rates but standard variable rates are much higher.
The lender’s funding sources: How the bank or building society sources the money it lends out as mortgages and the cost of it. This may be from their own savers’ deposits or from another source.
The lender’s required margin: The profit margin that the organisation requires or needs on its lending. This policy is likely to be decided by its directors.
How competitive the lender wants to be in the market: If a bank wants to originate more mortgages and grow their loan book they are likely to offer a more competitive rate compared to other lenders, and vice versa.
Other factors taken into account when setting the mortgage rate are linked to the type of mortgage and how the bank or building society sees the risk it involves.
The type of property: For example, whether it is a residential property to be lived in by the borrower, a buy-to-let property, a commercial property or some other kind. Interest rates on standard residential mortgages tend to be lower than other types.
The type of interest rate: Whether it is a fixed rate mortgage, a variable rate mortgage or perhaps a tracker mortgage. A fixed-rate mortgage is fixed for a number of years, typically one, two or five years.
The loan to value and the amount of the mortgage: Lenders may set different interest rates for smaller and larger mortgage advances. They will also often have different rates for how large the mortgage is in relation to the value of the property, known as loan to value or LTV.
The credit status of the borrower: Lenders will consider things such as a borrower’s employment, income, outgoings and their record of repayment (or default) on other credit they’ve had. Borrowers who are seen as less risky may be offered a lower interest rate mortgage than those who are seen as more risky. Limited companies may be charged a higher rate than individuals.
How to Find the Lowest Mortgage Rate
There are a number of ways in which you might be able to find a lower interest rate mortgage.
- Check your credit score with a credit reference agency. If any of the information is wrong, and might suggest you are a poorer credit risk than you are, have it corrected.
- Borrow less than you can actually afford to borrow. For example, borrowing only three times your income rather than four times may enable you to find a better rate.
- Take a lower loan-to-value mortgage if you can. For example, a loan at 70% LTV may have a lower interest rate than one at 90% LTV. Another way to look at this is to put down a larger deposit.
- Take a different fixed rate, if you are looking for a fixed-rate mortgage deal. The rate on a longer or shorter fix than you were planning on taking may be lower depending on the market at the time.
- Shop around. This is probably the best way of cutting your mortgage costs – shop around for the best rate available to you at the time.
Use a mortgage comparison site. Or use a mortgage broker. Using a broker can be effective if you are looking for a mortgage on an unusual property, or have less-than-perfect credit.
Always take expert financial advice if you are unsure if a mortgage is right for you.
What Will Mortgage Rates Be in 2024?
After several years in which it has been consistently low, it has become much more difficult to forecast what the mortgage rate might be in 2024.
Factors which will influence what the mortgage rate might be in 2024 include the bank rate. That is, whether the Bank of England increases or reduces the bank rate in 2024. It also depends on how lenders view the market. When setting their mortgage rates lenders are likely to consider the likely bank rate in 2024 and other factors such as the likely rate of inflation, what might happen to property prices, wage trends and employment trends.
Will Mortgage Rates Increase in 2024?
Some observers may feel that the mortgage rate will increase in 2024. This may be because inflation fails to fall nearer to the government’s target of 2% and so the Bank of England will increase the bank rate further to try and achieve this.
Will Mortgage Rates Be Cut in 2024?
Some observers may feel that the mortgage rate will decrease in 2024. This may be because inflation falls closer to the 2% target and so the Bank of England feels it can decrease the bank rate slightly.
Will Mortgage Rates Stay the Same in 2024?
There is a possibility that mortgage rates could stay the same in 2024.
If the bank rate does change in 2024 it may only be 0.25% or 0.5% either way. This does not mean mortgage rates will change by the same percentage however as several other factors are involved.
Some Forecasts
Comparison site MoneySuperMarket seems to think the interest rate will be around 5% in 2024.
Financial website The Times Money Mentor says most analysts think that interest rates have peaked, and will soon start to fall.
Online digital mortgage broker Tembo think actual mortgage rates (not bank rate) could be sub-4% at the end of 2024 or later.
* This report says US investment bank Morgan Stanley believes the Bank of England's base rate could fall to 4.25% by the end of 2024.
Bank of England to start cutting interest rates in Spring 2024 – Morgan Stanley
The Economy Forecast Agency (EFA), which uses statistical models to produce long-term financial market forecasts, offers some mortgage rate predictions: At the time of writing it says that the average mortgage rate in December 2024 will be 3.99%. This is approximately 1% lower than the end of 2023.
So what will mortgage rates be in 2024? The answer is that no one really knows. Perhaps the best way to try to get a handle on what mortgage rates might be in future is to take a broad spread of opinion from several different experts and commentators.