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Mortgages: When Will Interest Rates Go Down?

Latest insight into when mortgage interest rates are likely to fall and the pressures making mortgage borrowing more expensive for UK homeowners.

06 September 2023

Bank of England, when will interest rates go down

At the time of writing, the Bank of England base rate is set at 5.25%, following 14 consecutive hikes imposed by the central bank since December 2021. The fallout for homeowners, sellers and buyers is significant, with the average mortgage rate on a two-year fixed mortgage deal soaring from about 2.3% to over 6.6% – almost a three-times increase.

Today, we examine the facts, statistics, and some of the indicators that give us an idea about when interest rates might start to go down, making mortgages and other financing more affordable.

It is no secret that interest rates have spiked far beyond what many analysts predicted, causing chaos across the financial sector and for politicians called upon to explain what they are doing to relieve the direct impacts on the property market.

However, it is important to clarify that the ever-higher base rates introduced by the Bank of England are not the true cause. Instead, the bank has acted in response to sustained and persistent inflation, attempting to tackle the cost-of-living crisis by using monetary policy to encourage saving rather than spending.

The big question for thousands of those struggling to sell or waiting to buy is – when will interest rates start to decline, and how long should I wait before making key decisions about my planned property investment?

Unpicking the Factors Behind High Interest Rates and Borrowing Costs

Inflation is a complex topic, but at its core, it means that the things we buy and pay for are becoming more expensive, be that utilities, food, or credit. This results in the cost-of-living crisis we are all familiar with, where wages have not grown as quickly as outgoings.

The core job of the Bank of England (BoE) is to address this imbalance; the organisation, notably, is independent of the government and operates autonomously without taking direction from the government. Interest rates are not a political matter, although the BoE remains accountable to the British public and to parliament.

When making these decisions, the BoE is not targeting mortgage borrowers but instead needs to take a holistic view of the impacts on savings deposits, currency exchange rates, and how a weaker sterling can have a considerable impact on the cost of purchases.

High interest is intended to make borrowing more expensive and saving more lucrative as a broad-stroke measure designed to encourage businesses and individuals to curb unnecessary spending, which can drive inflation higher.

There are numerous reasons inflation has been such a big issue for the UK, but to summarise, the factors include:

  • Worker shortages following Brexit.
  • Costs of importing fuel and power suppliers from overseas.
  • Huge rises in energy costs due to the Russian invasion of Ukraine.
  • Slow post-pandemic recovery and the long-standing ramifications.

As an indication, in July 2023, inflation was assessed at 6.8% by the Consumer Prices Index, a welcome decrease from a peak of 11.1% in October 2022, when we saw the biggest inflationary rises since 1992.

One of the commonly misunderstood issues is around the budget introduced during the short-lived premiership of Liz Truss, who served as PM for just 49 days, having been appointed on 6th September last year.

While the raft of unfunded tax cuts, U-turns and £30 billion economic cost of the budget caused shockwaves, they were not a fundamental precursor to the interest rates we are seeing today – which would, in all likelihood, have been in the same position with or without the mini-budget.

Comparing Global Interest Rates

Inflation and the consequential interest rates are far from exclusive to the UK. As a quick snapshot, we have compared the base rates now in a sample of G20 countries compared to where they were in December 2021.

CountryBase Rate – August 2023Base Rate – December 2021
UK5.25%0.1% - 0.25%
US5.5%3.25%
Canada5%0.25%
Australia4.1%0.1%
Mexico11.25%5% - 5.5%
Brazil13.25%7.75% - 9.25%
Turkey25%15% - 14%

It is clear that substantial increases in base rates are an international issue and also that higher interest is pretty likely to remain the ‘new normal’ – it would be unwise to assume that when inflation course corrects and falls within the 2% central bank target, borrowing costs will automatically drop to the previous rates.

More information about UK Interest Rate History is available through the linked Think Plutus page, where you can find further details and updates when base rates adjust.

When Will UK Inflation cool – and Interest Rates fall?

The current situation is one of cautious optimism, with the caveats that we have mentioned about assuming interest rates will fall back to the levels we became accustomed to a couple of years ago. The BoE predicts that inflation will reach the 2% target by early 2025, with an anticipated drop to roughly 5% by the end of the current year.

Other analysts expect the base rate to hit 5.75% to 6% next spring but forecast a reduced rate of below 4% within the next five years or so.

Regardless of forecasts, the reality is that the BoE is not going to reduce the base rate until it sees a tangible and sustained drop in inflation, exercising conservative attitudes to ensure there is zero chance of any early knee-jerk reactions to placate the British public that end up being poor judgements.

For example, if the BoE were to suddenly drop base rates due to early signs of lower inflation, and those metrics jump the following month, the effect of greater spending could make the subsequent inflation figures far higher and exacerbate the cycle.

The reality is that nobody – no matter how knowledgeable – can know with absolute certainty what will happen, whether in the next few months, over the next fiscal period, or, indeed, over the next couple of years.

Instead, what we can do is evaluate the current position, determine the best course of action for borrowers in sticky situations needing to remortgage previously low fixed-rate deals, and make prudent decisions to ensure they are well placed to get the best possible rates available now and refinance as necessary when changes make mortgage borrowing more affordable.

Managing Interest Rate Uncertainty as a Mortgage Borrower

While the theory of all this is clear, there is no doubt that higher interest rates have placed millions of homeowners, landlords and prospective buyers in a difficult situation, with many feeling in limbo with no way of knowing when or how they will manage either ongoing mortgage costs or the level of financing needed to cope with the current average interest rates.

Some homeowners have seen their monthly repayments climb at least £500, and Bloomberg reports research by Savills that an estimated 25,000 landlords have opted to sell properties between April and May, owing primarily due to the lack of profitability of rental income compared to mortgage costs.

As of 23rd August, the average fixed-rate interest on a two-year mortgage was at a 6.74%, recognising that this can vary up or down depending on the lender, product, and applicant circumstances, with the cheapest rates around 5.9%.

The first point of call in any scenario is to contact your lender or an independent broker. The Mortgage Charter, introduced by the government in partnership with lenders and the Financial Conduct Authority on 10th August 2023, sets out actions all parties should take to support borrowers in difficulty.

Help for Mortgage Borrowers During Periods of Increased Interest Rates

Borrowers concerned about higher interest rates or unable to cope with the impacts on their finances should be eligible to apply for varied measures, such as:

  • Moratoriums on borrowers being evicted within one year of a first missed payment.
  • Options to lock in a rate six months in advance of a fixed rate agreement ending.
  • The right to request a better deal with a current lender until a new rate begins.
  • Switching to interest-only payments for a six-month period.
  • Extending mortgage terms to reduce monthly costs or reverting to original terms within a six-month deadline.

Whatever your circumstance, and however the increases in interest rates have affected you and your property ownership position or plans, Think Plutus is on hand to help.

As an independent and highly experienced mortgage broker with a focus on client service, we can provide further advice, tailored guidance and support at every step of the way.

Whether you feel you might be able to reduce your mortgage payments with an alternative lender, need to know the best way to manage increases in your repayments, or simply wish to discuss the right approach to address your homeownership concerns, our priority is offering up to date, professional assistance to ensure you make informed decisions to support your best interests.

Please get in touch at any point if you would like to discuss the information within this guide or arrange a private consultation in-person or remotely at your convenience.

Written By

Dave Relfe MCSI DipPFS CertSMP

Dave is the principal mortgage and protection adviser at Think Plutus. He has more than 15 years of experience in financial services and holds the Diploma in Financial Planning from PFS, Investment Advice Diploma from CISI, and the Certificate in Advanced Mortgage Advice from the Society of Mortgage Professionals. He has devised the unique Think Plutus approach that has helped many clients, from first-time buyers to buy-to-let investors and property developers, to people looking to remortgage or release equity from their property. Connect with Dave on LinkedIn.

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