Mortgage rates are falling and choice is increasing
More than 4,000 different deals are now available as the mortgage market continues to stabilise.
Mortgage rates are falling and product choice is increasing as the market continues to stabilise.
A total of 4,341 different deals are currently available, up from 3,643 in January, marking the first time product choice has risen above 4,000 since August last year.
The average interest rate charged on both two-year and five-year deals has also fallen for the third month in a row, according to financial information group Moneyfacts.
Mortgage rates fall to below 4% for lower loan-to-value mortgages
The typical cost of a two-year deal is now 5.44%, down from 5.79% in January, while interest on five-year fixed rate mortgages has dropped to 5.20%, from 5.63%.
The latest fall puts the cost of both products back where they were in October 2022, despite the Bank of England Bank Rate rising by 1.75% during the same period.
In further good news, the average amount of time a mortgage is available before it is withdrawn has increased to 28 days, the highest level since March 2022, and up from just 15 days in January.
Why is this happening?
Mortgage lenders withdrew products and hiked their rates in the wake of former Chancellor Kwasi Kwarteng’s mini-Budget in September last year.
The turmoil caused by the mini-Budget led to a steep rise in government borrowing costs, which in turn impacted the rate at which lenders borrow money for fixed rate deals.
As a result, banks and building societies pulled products for repricing, with the number of different mortgages available dropping to just 2,258 at the beginning of October.
But the market has been recovering steadily since Jeremy Hunt took over as Chancellor and reversed nearly all of the measures in the mini-Budget.
As a result, mortgage rates have been on a downward trend, despite the Bank Rate moving in the opposite direction.
What does it mean for me?
Mortgage availability has increased across all deposit levels. The biggest rebound has been for people with a 40% stake in their home, with 606 products now available, the highest level for three years and up from 484 in January.
There is also good news for first-time buyers, with 149 mortgages on the market for people with only a 5% deposit and 539 for those with a 10% one.
Rates are also falling across the board, with the average cost of a five-year fixed rate product for those with 40% to put down back below 5%, while two-year fixed rate deals for people borrowing 95% of their home’s value are averaging 5.99% and five-year ones are 5.53%.
What should I do now?
If you are sitting on your lender’s standard variable rate – the rate you are automatically put on when your existing deal comes to an end – you may want to think about remortgaging.
The average standard variable rate is currently 6.84% - its highest level since October 2008.
Remortgaging from this rate to an average five-year fixed rate deal of 5.2% would save someone with a £200,000 mortgage £200 a month.
Competition among lenders is currently more focused towards five-year fixed rate deals than two-year ones, with the gap between the interest charged on five-year and two-year products standing at 0.24%, the biggest margin for 15 years.
If you have enough flexibility in your budget to cope with future interest rate rises, you may want to consider a tracker mortgage.
Two-year tracker deals currently average 4.39%, although it is important to note that, unlike fixed rate mortgages under which the interest rate stays the same for the product term, tracker mortgages move up and down in line with changes to the Bank Rate.
Key takeaways
- Mortgage rates are falling and product choice is increasing as the market continues to stabilise
- A total of 4,341 different deals are currently available, the first time product choice has risen above 4,000 since August last year
- The average cost of a five-year fixed rate product for those with 40% to put down is now back below 5%
Mortgage rates fall below 4% for lower loan-to-value mortgages
The best new mortgage deals are now at below 4% for lower loan-to-value remortgages, a major improvement on the average rate of 6% in November 2022. Here's how much further I think they will fall.
The last 12 months have been a rollercoaster for mortgage rates. While mortgage rates have been falling steadily over the last decade, they spiked last year as a result of central banks increasing borrowing costs to curb demand and stop inflation getting out of control.
In the UK, the cost of mortgages shot up even higher as a result of the fallout from the Liz Truss mini budget in the autumn of 2022. Average mortgage rates peaked at over 6% having started 2022 at less than 2%.
The increase in mortgage rates is now reversing.
Average rates for new mortgages are starting to fall back quickly. Bank of England data for January 2023 shows the average rate for a new 75% loan-to-value 5-year fix is 4.8% and on a clear downward trend.
Mortgage rates vary according to the size of the mortgage and the value of the home it's borrowed against. And smaller loans get the best prices.
The cheapest rates are starting to emerge at below 4% for people staying in their homes and remortgaging with smaller loans. This is a major improvement to the 6% average last November.
The pricing of mortgages for buyers and those looking to remortgage is a complex process and much depends upon the path of interest rates and inflation in the UK and overseas.
We expect competition among banks to win new mortgage business to be strong in 2023 and this will mean some better deals for borrowers this year.
While it is welcome news that mortgage rates are falling, there is a risk that if inflation doesn't slow as fast as the Bank of England expects it to, interest rates may stay higher for longer.
Average UK mortgage rates are likely to settle in the 4% to 5% range in the coming months. This is certainly higher than recent years but still relatively cheap compared to historic levels for mortgage rates.
House prices and mortgage rates are key for would-be home sellers
Homeowners who want to move in 2023 are keeping a close eye on mortgage rates and the outlook for house prices.
The value a seller can achieve from their home today unlocks their next move, so the risk of a lower sale price - as well as higher borrowing costs - will impact what they can get with their next home in terms of location and size.
The start of the year has seen demand for homes tracking inline with the pre-pandemic years of 2018 and 2019. There is evidence that some would-be movers are holding back and waiting to see if the projections for big price falls and a year-long economic recession will materialise.
Major house price correction highly unlikely
The UK avoided recession in 2022 and the outlook is improving for 2023, although economic growth in the UK is set to lag behind other major western economies.
House price growth stalled in in the final quarter of 2022 and while sellers are taking bigger discounts of up to 4% to achieve sales, it looks very unlikely that homeowners are facing a major house price re-correction in the year ahead.
Sellers will need to accept that they might have to give up some of those record pandemic price gains to achieve a sale.
Every home is different, so it’s really important to speak to an estate agent to get an accurate view on who is in the market to buy a home like yours.
Affordable homes in high demand areas will still attract strong interest. Meanwhile, higher value homes that have seen prices surge ahead over the pandemic will need to be priced more carefully if the seller is serious about attracting interest and moving.
Lower mortgage rates will reduce the hit to buying power
The good news is that lower mortgage rates will reduce the hit to buying power for households looking to move home. In turn, this will limit the downward pressure on home prices in 2023.
The impact will vary across the UK, with the higher value housing markets likely to see the greatest pressure on sellers to be realistic about pricing expectations.
In the more affordable, lower-value housing markets, there will be less downward pressure on prices and some of these markets may avoid any year-on-year reductions in prices altogether.
Key takeaways
- Mortgage rates for the best products have fallen sharply
- Outlook for mortgage rates and house prices are key for home sellers
- Demand for homes is in reasonably good shape at the start of 2023
- Sizeable house price correction is highly unlikely
UK cities see record-high rent increases
The average UK rent has increased £120 in the past year with London, Manchester and Glasgow seeing the biggest hikes.
Rents charged ahead in 2022
The rate of rent increases in 2022 were at the highest level for the last decade. In December, the UK average rent was £1,118 which is 11.5% or £120 higher than a year ago.
Yet, the pace at which rents are increasing has slowed since peaking in July 2022 when rents were growing by 12.1%.
This growth in rents for new lets reflects the experience of a quarter of all renters who move each year.
For those staying put, the pace of rental increases is slower. Data from the Office for National Statistics on all private rented homes shows an average increase of 4.2%.
| Region | Average monthly rent | Annual rental growth (%) | Annual rental growth (£) |
|---|---|---|---|
| London | £1,976 | 16.1% | £270 |
| Scotland | £711 | 12.5% | £80 |
| North West | £777 | 11.3% | £80 |
| Wales | £811 | 11.2% | £80 |
| West Midlands | £830 | 10.1% | £80 |
| East Midlands | £803 | 9.8% | £70 |
| Yorkshire and the Humber | £743 | 9.1% | £60 |
| South East | £1,229 | 8.8% | £100 |
| Eastern | £1,069 | 8.7% | £90 |
| North East | £632 | 8.4% | £50 |
| South West | £1,007 | 8.2% | £80 |
| Northern Ireland | £688 | 5.9% | £40 |
| United Kingdom | £1,118 | 11.5% | £120 |
What’s causing rents to increase?
There isn’t a single answer to this question as the pace at which rental values rise depends on a combination of different national and local factors.
In 2022 we saw a chronic imbalance between the supply of homes to rent and the level of demand from renters. This encouraged competition between renters and gave rise to sizeable rent hikes.
High inflation, high employment and strong wage growth in recent years are additional drivers of rental growth, especially in urban centres.
Rents in inner London grew faster than anywhere else in the country
As London continues to recover from the pandemic slowdown, the capital is the region with the highest annual rental growth in the UK. In the last 12 months, the average rent for a new let increased by 16.1%, adding £270 to the average monthly rent.
High levels of demand in inner London are behind record-high rental growth, where rents went up by 17.4% on average in contrast to 13.3% in outer London.
The London Borough of Newham had the highest rate of rental increase anywhere in the country. In 2022, the average rent there increased by 21.2% or £320.
Popularity amongst professionals and students, regeneration projects delivering more newly-built stock of homes to rent and new connections with central London drive rental growth in this area.
In contrast, Havering - a leafier borough further east - saw the lowest level of rental growth in London as renters' preferences changed in favour of inner cities. Rents in this area increased by ‘only’ 9.2% last year, adding £120 to the average monthly rent.
Renters in cities saw the highest price increases
| City | Average monthly rent | Annual rental growth (%) | Annual rental growth (£) |
|---|---|---|---|
| London | £1,976 | 16.1% | £274 |
| Manchester | £977 | 14.8% | £126 |
| Glasgow | £844 | 13.1% | £98 |
| Edinburgh | £1,130 | 12.7% | £127 |
| Cardiff | £1,043 | 11.7% | £109 |
| Birmingham | £849 | 11.6% | £88 |
| Nottingham | £902 | 11.4% | £92 |
| Sheffield | £747 | 11.3% | £76 |
| Bristol | £1,297 | 11.0% | £129 |
| Cambridge | £1,439 | 10.4% | £136 |
| Aberdeen | £635 | 9.8% | £57 |
| Southampton | £1,036 | 9.6% | £91 |
| Newcastle | £745 | 9.2% | £63 |
| Leeds | £917 | 9.0% | £76 |
| Liverpool | £758 | 8.9% | £62 |
| Belfast | £701 | 6.7% | £44 |
Zoopla Rental Index, December 2022
High levels of rental inflation are not exclusive to the capital.
Manchester and some Scottish cities have also been affected by the record-high increases in prices of new lets.
In Manchester, the average rent is now £977 per month, up from £847 in December 2021. Rents in inner Manchester, Trafford and Salford are growing at the fastest rate in the North of England. In all three areas, the average new rent is now £140 higher than a year ago.
Our data also shows very high rental growth in the Scottish cities of Glasgow (13.7%), Edinburgh (+12.7%) and Dundee (12.6%). This above-average level of price increases for new lets is driven by a growing gap between demand from renters and the supply of homes to let in these cities.
What’s the outlook for the rental market in 2023?
We expect rents to continue to increase albeit at a slower rate in 2023. Supply will remain tight due to lower levels of new investment by landlords. A strong labour market and higher borrowing costs for home buyers will continue to stimulate demand for rented homes.
Fixing supply issues will take a long time and a larger renting budget is not an answer for everyone. Renters in the market for rental homes need to prepare for a greater set of compromises. Searching for smaller properties, an alternative location or modest features are common tactics.
However, steep rental growth is not sustainable in the longer term. Affordability pressures will start to limit the upward pressure on rents and so we expect rental growth to slow down in 2023 towards a national average of 5%.
Key takeaways
- Average UK rent increases by £120 over 2022 to reach the highest level in a decade
- Renters in London see the highest rent increases in the UK with annual growth of 16.1%
- Rents are also increasing at a record pace in other cities such as Manchester, Glasgow and Edinburgh