Bank Rate holds at 5.25%, so when will rates drop?

The Bank Rate has remained unchanged for the sixth time in a row since it was raised from 5% to 5.25% in August 2023. Meanwhile, average mortgage rates on two- and five-year fixed rate deals have increased for the first time in six months.

The Bank of England has kept the Bank Rate at 5.25% for the sixth time in a row.

The Bank’s Monetary Policy Committee (MPC) has voted by a majority of 7-2 to keep the Bank Rate unchanged at 5.25%.

Two members wanted to cut the rate by 0.25%, to 5%. This marks a slight shift from the last vote in March, when only one member voted to reduce the Bank Rate.

The Bank Rate, sometimes known as the 'base rate’ or ‘interest rates’, affects the rates that lenders charge their borrowers. It has remained at a 16-year high of 5.25% since last August.

Why has the Bank Rate been held again?

The Bank has been using interest rates as a way of controlling inflation. It raised interest rates from 0.1% at the end of 2021 to 5.25% last August.

The good news is that the Consumer Prices Index (CPI), a key measure of inflation, has fallen from 11.1% in October 2022 to 3.2% today.

However, 12-month CPI inflation dropped less than expected in March, prompting some people to speculate that interest rate cuts could be pushed back. The Bank has an inflation target of 2%.

The latest decision on interest rates was widely expected. The Bank said that while progress in key economic data is 'encouraging', it needs more evidence that inflation will stay low before it cuts interest rates.

The Bank added that lower oil and gas prices mean that inflation is expected to fall to around 2% before 'increasing slightly' in the second half of the year, to around 2.5%. It’s hoped it will then edge down again.

What does this mean for borrowers?

Borrowers on variable or tracker mortgages will be relieved that their rate is unlikely to go up. Though they’ll be disappointed the Bank Rate wasn’t cut.

According to Moneyfactscompare.co.uk, the average standard variable rate (SVR) is at 8.18%, down from 8.19% last November. The rate has stayed at this level since the start of April.

Meanwhile, borrowers locked into fixed-rate mortgages will not be impacted - yet. But borrowers who come off fixed-rate deals and remortgage soon are likely to see their mortgage repayments jump, squeezing household budgets further.

Annual mortgage repayments for the average buyer are now a staggering 61% higher than they were three years ago, before mortgage rates started climbing.

It means that in pure monetary terms, they have soared from £7,100 to £11,400. Two thirds of that hike is fuelled by higher mortgage rates, while one third is due to higher house prices.

First-time buyers are finding it tricky to afford mortgage repayments in the first place. Because of recent interest rate rises, mortgage affordability is now the biggest challenge for first-time buyers, according to the Building Societies Association (BSA).

But Nick Leeming, chairman of Jackson-Stops, points out that interest rates of around 5% are not high by historical standards.

“It’s important to keep in mind that, while the past 18 months have been a time of economic headwinds, the exceedingly low rates that became the norm in the 2010s were the exception and not the rule,” Leeming explains.

“A pivot towards lower rates in June, even if only minor, would help to ease affordability constraints at the lower end of the housing market and help to ensure chains don’t break down once sales have been agreed.”

What is the forecast for interest rates? 

The Bank is generally expected to cut interest rates this year (assuming there’s no surprises in store). But opinions on when exactly this could happen, and by how much, naturally vary.

Mark Harris, chief executive of mortgage broker SPF Private Clients, believes it’s time for rate setters to be bold and start reducing rates: “The Bank was always likely to hold rates this month, and we expect June’s meeting to have a similar outcome.

“That said, by that point there should have been two further lots of improving inflation data, reinforcing the argument for cutting rates by the end of the summer.”

Leeming adds: “While no change was widely assumed, the expectation is that June’s meeting will finally break the base rate deadlock and initiate a rate cut.”

Will mortgage rates go down in 2024?

The housing market has been relatively stable in recent months. The number of sales agreed are now 12% higher than this time last year.

This improving picture is echoed in the Bank of England’s recent mortgage approval figures.

The number of mortgages given the green light in March stood at 61,300, edging up from 60,500 the previous month. Monthly mortgage approvals are now close to the 65,000 level seen during the three years leading up to the pandemic, says Hina Bhudia, Partner, Knight Frank Finance.

But in a blow to borrowers, mortgage rates have climbed in recent weeks. Big names including Nationwide, NatWest and Santander have raised rates on fixed-rate mortgages.

According to Moneyfactscompare.co.uk, the average two-year and five-year fixed rate was 5.91% and 5.48% respectively on 1 May, compared with 5.8% and 5.39% at the start of April.

That said, two major lenders provided a glimmer of hope this week, cutting some rates. Harris says: “With Barclays and Lloyds already announcing reductions this week, hopefully it is only a matter of time before other lenders follow suit.”

Our Executive Director of Research, Richard Donnell, believes that even if inflation and interest rates edge down, mortgage rates are unlikely to drop much further this year.

Donnell explains: “Lower interest rates would likely result in further modest declines in mortgage rates but how far depends on how low money markets see base rates falling.

“Economists currently expect base rates to fall to 3.5% by the end of 2025, which would imply mortgage rates remaining in and around the 4%+ range.”

Despite an improved outlook overall, Lucian Cook, head of residential research at Savills, also thinks it’s unlikely there’ll be a further “meaningful” fall in mortgage rates this year.

He adds: “However the highly competitive nature of the mortgage market has meant that mortgage costs have already nudged down this year, and have been much less volatile. Combined with an improved outlook for economic growth, and increased buyer confidence, we can now expect modest house price growth this year.”

Key takeaways

• The Bank of England has voted by a majority of 7-2 to keep the Bank Rate at 5.25%
• It’s the sixth time in a row that the rate has remained unchanged
• The Bank says that while progress in key economic data is “encouraging”, it needs to see more evidence that inflation will stay low before it cuts the Bank Rate.

by Blackstones

Will mortgage rates go down in 2024?

Mortgage rates are not expected to fall further this year, but rising wages are likely to improve affordability for buyers as house prices stay flat.

In June last year, the average five-year fixed-rate loan for a 75% loan-to-value mortgage peaked at 5.8%, adding hundreds of pounds to monthly mortgage repayments for buyers and homeowners.

Today, that same mortgage has now fallen to an average rate of 4.4%.

Here’s how that difference pans out in terms of monthly mortgage payments.

Monthly repayments on a five-year fixed-rate 75% LTV over 25 years

Mortgage rates unlikely to drop below 4% in 2024

However, buyers holding out for lower mortgage rates in 2024 may be disappointed, as they are unlikely to decline much further this year, even if inflation and the Base Rate edge lower.

Our Executive Director of Research, Richard Donnell, says: ‘Expectations of lower interest rates are already priced into fixed rate mortgages today.

‘Lower interest rates would likely result in further modest declines in mortgage rates but how far depends on how low money markets see base rates falling.

‘Economists currently expect base rates to fall to 3.5% by the end of 2025, which would imply mortgage rates remaining in and around the 4%+ range.’

Why are mortgage rates going down?

Mortgage rates began to go down in the latter half of 2023, as inflation dropped from 6.3% in September to 4.2% in December. In February this year, inflation dropped to 3.8% and is expected to meet its 2% target in the coming months.

However, the Bank of England has held the base rate at 5.25% since August 2023, as inflation has stayed higher for longer than expected. It is expected to cut the base rate when it meets in June this year - and by the end of 2025, it's expected to lower it to 3%.

The bank rate determines the interest rate the Bank of England pays to commercial banks that hold money with them. It influences the rates those banks charge people to borrow money or pay on their savings.

What factors affect interest rates?

Inflation is the main reason interest rates are high in the UK at the moment. An unexpected rise in demand - or decrease in supply - can cause inflation to rise.

At the end of 2021, the Bank of England began to raise the base rate in order to reduce inflation and help slow down price rises for everyday items including food, petrol, gas and electricity.

It is working - and inflation has fallen a lot, but the Bank of England needs to keep the base rate high enough to ensure inflation comes back to its 2% target.

Global shocks can also have an impact on inflation, such as wars, pandemics or the blockage of major transport routes like the Suez Canal, as they affect the flow of goods around the globe.

How buyer affordability could improve in 2024

All that said, there are other ways in which buyer affordability is likely to improve this year: and that’s wages rising while house prices hold steady.

This trend is happening already, and it’s improving confidence among buyers.

‘Rising household disposable incomes are expected to be the primary driver of improved housing affordability over 2024,’ says Donnell.

‘Disposable incomes are projected to increase by 3.5% over 2024, while house prices look set to remain broadly flat over the year.’

In fact, momentum in the housing market is already ticking up and the number of sales agreed has climbed 9% year-on-year.

This, in turn, is encouraging more sellers to come to market, improving the choice available for buyers.

More choice for buyers in 2024

Currently there are 20% more homes for sale than there were in spring 2023, with the average estate agent having around 30 homes on their books.

And more choice for buyers means more opportunity for wriggle room when it comes to paying the asking price.

‘Our view is that a greater availability of homes for sale will keep price rises in check,’ says Donnell.

‘In Q1 2024, the average estate agent had almost 30 homes for sale, a return to the pre-pandemic average.

‘This means buyers have more choice and room to negotiate, especially where homes are failing to attract buyer interest in a timely manner.’

Affordable areas remain popular with buyers

While momentum is up among buyers and sellers across the UK, in more challenging mortgage rate times, it’s the affordable areas that are proving to be the biggest draw for buyers.

‘Sales activity is up across the board, with the strongest growth in sales taking place in areas with more affordable house prices, such as Yorkshire and the Humber (11%) and the North West (13%),’ says Donnell.

Meanwhile, the strongest growth in new sellers listing homes can be seen in the South West (28%) and North East (26%).

Over in the capital, the supply of homes for sale is just 8% higher, which means house prices are rebounding faster here than other parts of the UK, as more buyers compete for properties.

Asking price discounts narrow as house prices hold steady

While it remains a buyers’ market right now, buyers should know that the discounts being offered by sellers are starting to get smaller.

Towards the end of 2023, nearly half of sellers were offering discounts of 5% or more. That figure has now shrunk to two-fifths.

Similarly, the average discount offered at the end of last year was 4.5%, (£14,250). Today, it’s 3.9% (£10,000).

There continues to be a north/south divide in house prices, with homes in the south continuing to register house price falls as homes in the north see house price growth.

But all areas are recording higher annual price inflation than six months ago, as sales volumes recover and pricing levels firm.

So while there’s still room to negotiate, house prices are starting to hold steady in 2024 and we don’t expect to see a further fall in property prices this year.

Key takeaways

• Mortgage rates expected to stay in and around 4+% for the rest of 2024
• House prices will hold steady as rising wages improve affordability
• 20% more homes available for buyers in spring 2024
• Average agent now has 30 homes on their books

by Blackstones

Housing affordability more of a challenge in southern England

The challenges facing first time buyers and uspizers right now all boil down to one thing: affordability. And buyers in the south of England are suffering the most on this front. Our Executive Director of Research, Richard Donnell, takes a look at what’s happening in the housing market.

The divide in market activity between the south of England and the rest of the UK is becoming starker on the back of higher mortgage rates.

Why are homes in the south more expensive?

After the global financial crisis in 2007, house prices in southern England rebounded, largely led by London. By 2014, house prices in London were rising at a rate of 20% year-on-year.

In 2015, mortgage regulations were introduced to prevent households taking on unsustainable levels of debt, which can lead to a boom/bust cycle for house prices.

However, those regulations came a little too late for southern England, where prices had already jumped ahead.

Since 2016, we have seen house price inflation under-perform, especially in London, and one key reason for that is the impact of those mortgage regulations.

They’ve meant that buyers have needed to inject more equity into the home they want to buy, in order to make their mortgage repayments more affordable.

The impact of stress testing mortgages and limiting high loan-to-income lending has since led to a decrease in buying power, which in turn has created a cap on demand.

Incomes needed by first-time buyers across the UK

The chart below shows the gross household income needed to rent and buy a typical first-time buyer priced home.

If a buyer is taking out an 80% loan-to-value mortgage (using a 20% deposit) at a rate of 4.5%, the income needed to repay it is broadly the same across most of the UK.

However, because house prices are higher in southern England, for the same type of property, buyers will need to be earning considerably more: well over £100,000.

When that purchase is then stress tested to an 8.5% mortgage rate, the income needed to secure the property jumps even higher, thereby ultimately reducing the number of people who can afford to buy it.

Data from the Office for National Statistics reveals that first-time buyer incomes are generally lower than the income needed for mortgage lenders’ stress-testing rates.

So, first-time buyers are getting around this problem by putting down larger deposits.

This enables them to get their loan-to-value percentage for their mortgage down, so that they can then afford to buy their home at the current stress-testing rates - and their monthly mortgage repayments then become more affordable.

Average first-time buyer deposit in London hits £145,000

In London, this approach means the average first-time buyer needs to have a £145,000 deposit and an annual income of £90,000.

It’s a similar but less extreme position across the rest of the south of England.

However for the rest of the UK, where house prices are lower, the average deposits needed to secure a home and the mortgage repayments for it look more manageable for more would-be buyers.

Calls for higher LTV loans to be made available, alongside the loosening of mortgage regulations, would help FTBs, but they would simply add to buying power, rather than delay the needed reset in affordability.

High LTV lending is very hard to achieve across southern England and consequently 95%+ lending here is a niche lending segment.

What industry solutions might help first-time buyers?

Long-term fixed rate mortgages are an option but this is a market that needs Government support to get off the ground.

Long term mortgages could potentially avoid the need to run a stress test on the borrower at a higher mortgage rate but the ‘loan to income flow’ limit would limit the size of the market: currently lenders are only able to lend 15% of their customers loans of over 4.5x their current income.

It is likely that we will see lenders look to review how they stress test new borrowers, such as applying lower stress rates for 5+ year fixed rate loans.

This flexing of affordability at the margins will help some borrowers. But it wont deliver the reset we need to open up the market to more buyers who don’t currently have access to the levels of equity needed.

With mortgage rates unlikely to get much lower in the short term, incomes growth is going to have to do the hard work in resetting affordability across southern England.

First time buyers adapting to market conditions

Our data shows first-time buyers in southern England are adapting, looking at areas with better value for money for the type of home they need as well as considering smaller homes at lower price points.

We have seen a shift to flats, which have attracted less demand in recent years, as first-time buyers targeted 3 bed homes at lower prices where there was the potential to improve the home.

The average value of a flat in London is just 3% higher than at the start of 2016. This compares to a 13% average increase for flats nationally and 39% for a house in the UK. This underperformance has made flats more affordable relative to incomes and explains the increase in demand.

Buyers should know though, that flats are often sold under the leasehold, which can mean additional running costs such as service charges and ground rents.

Key takeaways

• In 2014, London house prices were rising at a rate of 20% year-on-year
• In 2015, mortgage regulations began to include stress tests, often at rates 3% higher than the mortgage deal being offered
• This has reduced buying power in the south, where homes are more expensive
• In 2024, the average first-time buyer in London needs to have a £145,000 deposit and an annual income of £90,000

by Blackstones