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Published 29 November 2023

Scope For Mortgage Rate Cuts Despite Warning They May Slow

There may be room for mortgage rates to carry on falling but there are suggestions the OBR inflation forecast could see the pace of cuts slow. Here are our latest mortgage rate predictions.

UK mortgage rate forecast for December 2023

A sharp slowdown in inflation has raised hopes that mortgage rates may fall further throughout the rest of 2023. However, there are warnings that the pace of rate cuts may slow after inflation projections were revised up for 2024 and 2025 by the Office for Budget Responsibility (OBR).  

Lenders have mainly been lowering the rates on fixed-rate mortgages since late July. And since it was confirmed that Consumer Prices Index (CPI) inflation dropped from 6.7% in September to 4.6% in October, some average mortgage rates enjoyed their largest weekly reductions of the second half of this year.

The inflation reading, which was lower than the 4.8% predicted by economists, has led financial markets to suggest that the Bank of England base rate may be at the peak of its latest cycle. The rate has been unchanged at 5.25% since the start of August, when the last of 14 consecutive rate rises, which have been used to try to slow UK inflation, was announced.

When the Bank’s Monetary Policy Committee (MPC), which decides what happens with the base rate, last met at the start of November, six members voted to leave the rate on hold while three wanted to see the rate rise to 5.50%. At the previous meeting in September, the vote was closer, with five voting to hold and four favouring a rise. 

Base rate predicted to stay on hold

For many, the inflation figures reinforced suggestions that the base rate will remain on hold at 5.25% when the next decision is revealed on 14 December. One further round of wage data, which rate-setters also monitor closely, is due to be released before the announcement, but isn’t expected to provoke a move in the base rate in either direction. The next round of inflation data will be released on 20 December. 

If the base rate is thought to be at its peak, the question, particularly among borrowers with a tracker mortgage or on their lender’s standard variable rate, is when will it start to fall? Financial markets suggest the earliest a cut in the base rate may be seen is perhaps May or June 2024, with no other changes forecast before then.  

In a further sign that variable rate borrowers will need to bide their time, the governor of the Bank of England, Andrew Bailey, also told the National Farmers’ Union that it was “far too early to be thinking about rate cuts”. He also warned of the possibility that rates may need to rise again if there were signs of inflation being persistent. 

Inflation outlook may slow rate changes

The Autumn Statement, delivered by the Chancellor Jeremy Hunt on 22 November, may also influence mortgage rates going forward. The statement itself contained little in the way of direct support for prospective homebuyers and the property market as a whole. However, the latest OBR forecasts, which were announced at the same time, don’t seem to have gone unnoticed by lenders. 

Of particular interest would have been the OBR suggestion that inflation may “remain higher for longer” than it had previously predicted. In turn, its November outlook stated: “More persistent inflation means markets expect interest rates to be more than a full percentage point higher than we assumed in March.” 

In the week after the revised OBR forecasts were published, Justin Moy, managing director of independent broker EHF Mortgages, said he had noticed a change in swap rates, which reflect the cost to a lender of funding fixed-rate mortgages and are therefore a key factor when setting fixed mortgage rates.

“Following the Autumn Statement, swap rates have wobbled upwards a fraction, so this will slow down the rate changes between now and Christmas whilst lenders take breath,” said Moy. “Some smaller lenders have already blamed the statement for their relatively small increases, larger lenders will just absorb a small amount of cost for their position in the market.”

Fixed rates still heading lower

The encouraging news for mortgage borrowers is that the typical rates on fixed-rate mortgages continued to fall in November. According to Rightmove data for 28 November, average rates on two- and five-year fixed-rate mortgages at every loan-to-value (LTV) the property website monitors will end the month notably lower than where they started it. 

Average fixed-rate deals have generally been heading lower since the final week of July, making a significant difference to the repayments borrowers would have faced had they locked into a fixed rate four months ago compared with now. 

For example, homebuyers with a 40% deposit have seen the average rate on a two-year 60% LTV fixed-rate mortgage drop to 4.90% on 28 November, down from a peak of 6.38% on 25 July. This equates to a saving of more than £133 per month on a £150,000 mortgage arranged over a 25-year term, or more than £3,200 over the two-year fixed-rate deal period.

Despite last month’s prediction that mortgage rate cuts may stall, November saw certain LTVs record some of the largest week-on-week average rate reductions seen since rates started to trend down earlier this year. This included mortgages at 95% LTV, typically aimed at first-time buyers, where average rates on both two- and five-year deals dropped by 0.17 percentage points in the week to 21 November, to 6.03% and 5.56% respectively. 

“We already have sub-5% rates for both remortgages and purchases, and a sub-4% buy-to-let deal launched last week, so we have had some really positive improvements over the last three months, but swap rates might just pause the speed of rate cuts until the end of 2023,” concluded Moy.

Image source: Getty Images

About the Author

Tim Leonard

Tim is a writer and spokesperson at NerdWallet and holds the Chartered Insurance Institute (CII) Level 3 Certificate in Mortgage Advice. He has over 20 years’ experience writing about almost…

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