Mortgage interest rates: when will they come down?

Mortgage rates have fallen back below 6% on average, but borrowers are still facing higher costs to get on or move up the property ladder.

Customers have seen mortgage pricing "driven up" by consecutive increases to the base rate, said Moneyfacts, as part of the Bank of England’s efforts to "tackle chronically high inflation".

But with inflation dropping to 6.7% and the Bank keeping interest rates unchanged in September, the average five-year mortgage has "dropped back below 6%", according to the comparison website.

The average two-year fixed mortgage rate has also dropped below 6%, said Rightmove, which is still "very high" compared with the ultra-low levels of recent years but the property website said it is "further evidence of the positive downward trend of fixed rates".

Rates are still "far higher" than those seen in the past decade, added MoneyWeek, meaning potentially higher monthly repayments for homeowners and buyers.

Many will be protected from these rises if they are currently on a fixed-rate mortgage but they face a "painful, though hopefully not ruinous, payment jump" if their existing deals expire this year, wrote John Stepek at Bloomberg.

Most of these borrowers currently pay less than 2% interest after fixing their mortgages during the ultra-low interest rate environment of the pandemic, added Moneyfacts. "This means when they come up for renewal, they could see their rate more than double."

All of this is making life more difficult for homeowners, and those hoping to get on the property ladder.

What determines mortgage rates?

Lenders consider a range of factors when setting their mortgage rates.

One factor is the cost of borrowing, known as the interest rate, which is set by the Bank of England (BoE) base rate.

If the BoE’s interest rate rises, home loans will usually become more expensive as lenders "pass on the increase in the bank rate to their customers", said MoneySuperMarket. So a higher base rate usually translates to higher monthly mortgage payments.

Another consideration is the cost the banks face for obtaining funds to lend on the financial markets, which is based on swap rates. These are "the yardstick by which they lend money to each other", said the i newspaper.

When swap rates are higher, the newspaper explained, lenders push mortgage rates up so they can maintain a profit.

When will mortgage rates come down again?

With the rate of inflation falling, the BoE’s Monetary Policy Committee held interest rates at 5.25% in September, which has meant "some mortgage rates have now been adjusted", added MoneyWeek, offering cheaper deals.

The pause in interest rate rises means there is a "better chance" of borrowers getting mortgage rates of less than 5% when they renew, brokers told BBC News.

Lower inflation has also given banks and building societies "more confidence" to lend money at a cheaper price, said The Times Money Mentor.

Swap rates had largely settled over the past few weeks, but they have risen after the latest data showed inflation remained at 6.7% in September, and is not slowing as quickly as hoped.

The closer mortgage rates get to 4%, said Zoopla, "the more buyers will come back to market" as borrowing will be more affordable.

However, the BoE could also come under pressure from "geo-political tensions in the Middle East" if oil prices soar, said Forbes Advisor, which could push inflation up and cause more interest rate rises.

Which mortgage should you choose?

There are two main mortgage products: fixed rates and trackers.

Fixed-rate borrowers pay a set amount each month for a defined period, which can make it easier to budget and means your payments remain steady even if interest rates rise, said Money.co.uk.

This may sound attractive when rates are low, but "think carefully before committing for too long as some fixed-rate mortgages may have an early repayment charge", the financial website said. Plus, if interest rates go down during the fixed-rate period, your payments won’t, the website added.

A tracker mortgage usually follows the BoE’s base rate. Tracker rates are currently priced lower than fixed deals, but there is always the risk that rates will rise even higher, "leaving you gambling if you don’t fix, because then you will be at the mercy of a higher tracker, therefore higher mortgage repayments", warned Online Mortgage Advisor.

It is currently "cheaper to fix for longer", said The Guardian, but if you think rates will come down "fairly soon and fairly sharply", you may not want to commit to a rate that is around its current level.

Some buyers may be tempted to wait and see if mortgage rates drop further this year, but not everyone thinks that is a good idea. While homeowners may be "tempted" by rate drops, the volatility of the market could mean it is a "gamble" to wait longer, said This Is Money.

How to boost your chances of getting your mortgage approved

Lenders will typically use an income multiple of 4 to 4.5 times salary per person when assessing a mortgage application, sometimes rising to 5 or 5.5 times for higher earners, said The Times Money Mentor, but you will need to pass tough affordability tests.

This involves examining your income and outgoings. So "the more money you spend each month, the less you might be able to borrow", the website said.

You can boost your chances of getting a mortgage by checking your credit report – a record of all your debts such as loans and credit cards and how good you are at making repayments.

These reports are compiled by providers such as Experian, Equifax and TransUnion and calculate a credit score based on the debts you have and your repayment history as well as whether you have ever been made bankrupt or received county court judgments.

The report gives a lender an idea of whether you are a responsible, reliable borrower and likely to repay the debt. "Usually, a higher score means you’re seen as lower risk," said Experian.

You can improve your creditworthiness by making payments on loans, credit cards and bills on time and by getting on the electoral register so lenders can verify who you are, said Equifax.

Be careful, though, as making lots of applications may suggest to lenders that you are reliant on credit, so if you plan on applying for a mortgage, "it might be helpful to be selective about what other loan applications you make", Equifax added.

First-time buyers and renters looking to get on the property ladder have recently been given new hope with the return of 100% LTV mortgages. For example, Skipton Building Society has launched a no-deposit mortgage aimed at tenants who can show a good track record of paying rent.

The rate is 5.94% for five years, which is "quite a premium" to pay for not having a deposit, MoneySavingExpert said, plus you can only borrow the equivalent or less than you pay in rent.

How to find support if you are struggling to pay your mortgage

Around 350,000 households "could face payment difficulties by the end of June 2024", the Financial Conduct Authority has warned, due to interest rate changes and the cost-of-living crisis.

UK Finance has said lenders are committed to helping customers who might be struggling with their mortgage payments, "with a range of tailored support available".

The organisation said anyone who is concerned about their finances "should contact their lender as soon as possible to discuss the options available to help", reported Yahoo Finance.

Support may include temporary payment arrangements, lengthening the term of your mortgage, or switching temporarily to interest-only repayments, said MoneyHelper.

You can also get free housing advice from Shelter and support on managing debts from charities such as National Debtline and StepChange, added MoneyHelper.

Benefit claimants, such as those on Universal Credit, may be able to get help with some of their monthly repayments through the government’s Support for Mortgage Interest (SMI) scheme.

Before making major mortgage changes, brokers suggest making personal spending cuts. "Many of us are more financially stable than we think we are when we look closely," Carmen Green, mortgage and protection adviser at Xpressmortgages, told FT Adviser. "Changing to interest-only or taking payment holidays could just delay the problem for many, rather than solve it."

Marc Shoffman is an award-winning freelance journalist, specialising in business, property and personal finance. He has a master’s degree in financial journalism from City University and has previously written for FTAdviser, ThisIsMoney, The Mail on Sunday and MoneyWeek.