Bank of England base rate held at 5%: what does this mean for mortgages?
What’s happened to the base rate?
The Bank of England has held the base rate, following last month's drop to 5% from 5.25%.
The base rate held at 5.25% for 11 months prior to last month's cut, having risen rapidly from a low of 0.1% in November 2021.
Higher base rates were needed to control inflation, which reached 10% in early 2023 and is currently hovering at 2.2%, just above the Government’s target of 2%.
The decision to hold the base rate, rather than increase it, will be welcome news for businesses and households alike, as it’s a sign that borrowing costs are not likely to increase.
As we look to next year, city economists are forecasting that it’s likely the base rate will fall to 4% by the end of 2025.
What does the base rate hold mean for mortgages?
The cost of a mortgage is not directly set by the Bank of England official base rate. Lenders mainly source their finance for fixed rate mortgages in the money markets.
The cost of this money is influenced by the expected direction of base rates, among other things.
Most borrowers using a mortgage to buy a property are on fixed rate loans for 2 or 5 years.
In the days leading up to the base rate announcement, two-year swap rates, that's the rates at which banks borrow money, started to drop from 4.3% to 4%.
Five-year swap rates dropped from 3.9% to 3.7%.
The situation has been improving for fixed mortgage rates too.
The latest Bank of England data for a five year fix 75% LTV has fallen to 4.3%, the lowest level seen in the last 2 years.
Based on current predictions, the mortgage rate forecast for 2025 is that rates will continue to go down, falling to around 4% by the end of next year.
Our Director of Research and Insight, Richard Donnell, says: “There is a mix of hope and expectation that average mortgage rates starting with a 3 will become the norm at some point soon, supporting those refinancing and breathing more life into the sales market by supporting home buyers.
“The underlying cost of finance for fixed rate loans has fallen in recent months as expectations for base rate cuts ebb and flow.
“This means average mortgage rates of 4-4.5% for a 5 year fix.”
But to help buyers, mortgage stress-testing needs to come down from around 8% to 6%.
“While the 'pay rate' for loans is falling, affordability stress tests continue in the background,” says Donnell. “This used to be 3% over the Standard Variable Rate and is now 1% over the revert rate once the initial deal comes to an end.
“This means lenders are typically stress testing new business at around 8%, although this appears an area where lenders are likely to be innovating to support new business and affordability.
“With city forecasts that the base rate will plateau at 3-3.25% by 2025/2026 it’s not unreasonable to assume the 5 year SWAP rate might plateau at this level.
“This will put average mortgage rates in the high 3% and low 4% range as the new normal.”
How will the base rate holding impact home buyers and the housing market?
The housing market is steadily adjusting to higher mortgage rates, with the worst of the impact felt in 2023.
2024 got off to a good start: households that put decisions on hold last year have returned to the market knowing that base rates aren’t going to rise any higher.
“The housing market is on track for 10% more homeowners moving compared to last year, and Zoopla expects average house prices to be 2% higher by the end of the year,” says Donnell.
"A key sign of confidence returning to the sales market is that buyers are paying almost 97% of the asking price. This is the highest it’s been for 18 months..
"Mortgage rates of 4-5%, while higher than the ultra low rates of 2019-2021, are becoming more manageable for home buyers. This is demonstrated by more sellers and more sales being agreed.
"Further growth in household incomes will help improve affordability, especially as we expect incomes to rise faster than house prices over the next 18 months."
What’s the impact on the mortgage market?
The mortgage market remains very competitive with lenders offering a wide range of mortgage deals for all types of buyer. Rates are changing all the time and responding to the outlook for the cost of borrowing.
If you’re looking to take out a new mortgage within the next six months, you can lock in the best rates available today.
When booking in a new mortgage deal, you can approach individual banks and building societies to find out their best rates. Or, you can work with a mortgage broker who will scour the market to find the best deals available to you.
Mojo Mortgages is part of the Zoopla family and works with over 70 different lenders across thousands of mortgage products.
Mojo won’t charge you for their services, because they charge the lender you choose to go with instead.
And if mortgage rates drop between now and the time your deal is due to start, you can ask your broker to rescan the mortgage market for you.
Key takeaways
- Bank of England base rate holds at 5%
- But swap rates, the rates banks pay to borrow money, have been falling in the last few days
- And the latest Bank of England data reveals 5-year, fixed-rate deals have fallen to 4.3%, the lowest level seen in the last 2 years
Should I buy my first home in 2024?
Mortgage rates have fallen by 1.2% since this time last year, saving the average first-time buyer £100-a-month in mortgage payments and £4,000 on a deposit.
A third of homes sold in the UK each year are bought by first-time buyers (FTBs).
But last year’s spike in mortgage rates meant buying a first-home became prohibitively expensive for many.
Highly motivated buyers either saved for bigger deposits or bought a smaller home than originally planned.
Others paused in their search, waiting for the cost of borrowing to fall.
Since the beginning of this year however, things have started to look up and our data shows demand for first homes has risen 20% year-on-year.
In fact, many first-time buyers are now looking at more expensive properties, averaging £249,100.
Mortgage repayments fall by £1,160 per year
According to Bank of England data, average mortgage rates have fallen from 5.7% last year to 4.5% today for those taking out a new 5-year, fixed-rate mortgage with a 25% deposit.
As a result, we estimate the average deposit is now £4,000 less than this time last year, despite many FTBs looking for larger homes and taking out larger mortgages.
Lower mortgage rates also mean lower monthly repayments, which have dropped from £1,076 to £979* for a typical first-time buyer home.
This translates to a monthly saving of £97 and an annual saving of £1,160.
However, as deposits fall and the prices of what FTBs are looking to buy increase, many are now borrowing more than they would have a year ago.
This, in turn, means that lenders will require a higher income to buy: £57,500 on average, up from £55,800 a year ago.
| Measure | July 24 | Jan 24 | July 23 |
|---|---|---|---|
| Most in-demand price point | £249,100 | £247,200 | £245,700 |
| Average deposit | £56,000 | £59,600 | £60,400 |
| Average mortgage size | £193,900 | £187,600 | £185,300 |
| Monthly repayment | £979 | £943 | £1,076 |
| Income to buy | £57,500 | £56,500 | £55,800 |
Zoopla research using UK Finance and Bank of England data
3-bed houses unquestionably the favourite choice
Half of first-time buyers outside of London are looking to buy a 3-bed house.
Despite mortgage rates rising in recent years, the more affordable end of the 3-bed market is still in reach for many households, especially for those looking to add value to their homes.
The exceptions are London and Scotland, where around a third of FTBs are looking to buy a 2-bed flat, making it the most popular choice in these regions.
This is largely down to the availability of stock in these areas, with flats being most commonly available, and the fact that affordability remains an important factor in the capital, given the high cost of buying a house there.
First-time buyers plan to spend £3,400 more on a home in 2024
Our data reveals FTBs are looking to buy homes costing £3,400 more than this time last year, an increase of 1.4%.
Yet mortgage rates have moderated over the same period, meaning monthy mortgage repayments have now dropped 9% for the average first-time buyer.
The prices of homes FTBs are looking to buy have risen the most in the North West (+4.4%) and East of England (+4.3%) since July 2023.
Prices for these homes were falling this time last year, but today’s reversal demonstrates that FTBs are now prepared to spend more on a home as the cost of borrowing comes down.
As well as being willing to pay higher prices, first-time buyers are also looking for larger homes in the North West and East of England, with three bedrooms or more.
However, in the North East and South of England, buyers are now looking for less expensive homes than in previous years.
This shows that mortgage rates haven’t fallen enough to ease affordability pressures in the South.
And while affordability looks stronger in the North East, first-time buyers are more sensitive to changes in the cost of living, which is why FTBs continue to look for lower-value homes here.
The prices of homes first-time buyers are looking to buy
| Location | July 24 | July 23 | Year-on-year change |
|---|---|---|---|
| South West | £244,400 | £250,900 | -2.6% |
| North East | £126,500 | £128,100 | -1.2% |
| South East | £327,700 | £331,400 | -1.1% |
| East Midlands | £213,800 | £213,700 | 0% |
| Scotland | £158,200 | £157,700 | +0.3% |
| Wales | £176,500 | £174,500 | +1.1% |
| Yorkshire & The Humber | £157,600 | £154,800 | +1.8% |
| London | £411,900 | £401,800 | +2.5% |
| West Midlands | £294,600 | £199,400 | +2.6% |
| East of England | £320,800 | £307,700 | +4.3% |
| North West | £171,500 | £164,200 | +4.4% |
| UK | £249,100 | £245,700 | +1.4% |
What’s the outlook for first-time buyer homes?
In 2024, the situation has improved for first-time buyers.
Growing earnings, modest house price growth and more attractive mortgage rates have boosted buying power for some, encouraging them to return to market.
However, affordability remains a key issue for many households interested in buying for the first time.
We expect mortgage rates to remain above 4% for the foreseeable future.
First-time buyers for whom this remains a barrier may choose to move further afield to access more affordable markets or consider purchasing a smaller property.
Looking to buy in 2024? Our Buying a Home guide has everything you need to know.
* Assumuming same mortgage term of 30 years; mortgage rates of 5.7% in 2023 and 4.5% in 2024; LTV of 75.4% in 2023 and 77.5% in 2024; and average price of £245,700 in 2023 and £249,100 in 2024.
Key takeaways
- Mortgage rates fall from 5.7% to 4.5% in a year, cutting £4,000 off the average deposit needed to buy a first home
- Monthly mortgage repayments are also less hefty, down £97-a-month compared to July 2023
- First-time buyers are now looking to spend £3,400 more on their first home as a result