Britons are hoping for a major fall in mortgage rates, which have been climbing year-on-year and make house purchases for first-time buyers and existing payments for mortgage owners increasingly difficult.
In June, the Bank of England kept rates at 5.25% for the seventh consecutive time, even though inflation had dropped to the target of 2%.
Some economists expected rates to decrease in August, but the latest inflation data suggests the Bank might not reduce rates until the autumn, when the new budget is announced.
Interest rates in a nutshell
An interest rate shows how much it costs to borrow money or the reward for saving it. When it comes to mortgage rates, it is made up of The Bank of England’s base rate, which is what it charges other banks to borrow money.
The Bank of England changes rates regularly to control UK inflation – the rate at which prices increase over time.
When inflation is high, the Bank may raise rates to keep it near the 2% target, encouraging people to spend less and lower inflation.
When inflation is under control, the Bank may hold or cut rates. But the rates have been increasing each year by 1% since 2021 and this has had very difficult implications for prospective and current homeowners across the UK.
The impact to homeowners and buyers
David Beard, founder of Lending Expert, a mortgage broker based in Cheshire commented: “It has been very hard for UK households in recent years. With covid and Brexit, rising energy prices and cost of living crisis, the consistent increase in the Bank of England base rate and mortgage rates has been debilitating for many.”
“For those looking to buy their first home, it is significantly more costly and difficult to cover monthly mortgage payments and those already in homes are going to be feeling the pinch when they have to remortgage or leave their existing deals. Reports show record numbers of homeowners falling behind on mortgage payments. This has negative impacts for the economy where people have to cut social and general spending to maintain living costs.”
“As a broker, we want to see a flourishing market and encourage a lowering of rates to stimulate house buying. If the rates were updated this August, it would be tremendous going into the busy season of Q4, but an update in the Autumn Budget would also be welcomed.”
When will UK interest rates go down?
The current Bank rate of 5.25% is the highest in 16 years, though it was much higher in the 1980s and 1990s, reaching 17% in November 1979.
There are questions about why rates haven’t been cut, given inflation is now much lower than its peak of 11.1% in October 2022.
The main inflation measure, CPI, was 2% in May and stayed the same in June – the lowest rate in nearly three years.
When inflation hit 2% in May, some economists predicted the Bank would cut rates in August. However, the Bank considers other inflation measures, and some are still higher than desired.
Recent figures show some sectors, like services (restaurants, hairdressers), still have significant price increases.
This may lead the Bank to hold rates in August and cut them in September.
The Bank must balance slowing price rises without harming the economy, avoiding cutting rates too soon only to raise them again later.
How much could interest rates fall?
Though UK inflation hit the Bank’s 2% target, it may rise slightly this year before stabilizing in early 2025, making interest rate predictions difficult.
In May, the International Monetary Fund (IMF) suggested UK rates should fall to 3.5% by the end of 2025, noting the Bank needs to avoid cutting too soon before inflation is controlled.
However, the IMF’s latest forecast warns that persistent inflation in the UK and US might keep rates higher for longer.
