How far will mortgage rates fall in 2023?

The rise in mortgage rates in the last 2 months has been the main reason for the recent slowdown in the housing market.

But things are looking a little more positive for borrowers as we head towards the New Year, and we expect mortgage rates to settle between 4.5% and 5% by mid-2023.

Along with a widespread fall in house prices by up to 5%, more affordable mortgage rates will encourage some people to move next year and we’re anticipating 1 million completed sales in 2023.

Underlying cost of fixed rate mortgages for lenders falls to 4.1%

The underlying cost for banks to borrow for a  5-year fix – the most popular initial term – has fallen from 5.5% to 4.1% since early October.

Lenders add a margin for risk and profit on top of this underlying cost. This is why mortgage rates soared to 6.5% after the mini budget.

We expect the recent fall in the cost of finance for banks to translate into more affordable fixed mortgage deals on the high street, with mortgage rates at or below 5% in January then settling at between 4.5% and 5% by the middle of the year.

Compared to the 6.25% rates of recent months, it will put the 6 in 10 mortgaged buyers who use a 5-year fixed mortgage in a stronger buying position in 6 months’ time.

Greater choice returns to the housing market

More buyers will reduce reliance on mortgage finance in 2023

A 4.5% or 5% mortgage rate is still a material increase in costs for the 7 in 10 buyers who use a mortgage, compared to the sub-2% rates of recent years.

As a result, we expect more home buyers to look for ways to reduce their reliance on mortgage finance.

They’ll look to borrow less by changing what they need in their next home, coming up with more equity or waiting to see if further falls to house prices or mortgage rates come later in 2023.

Together, this will further reduce the housing market’s reliance on high loan-to-value mortgages, a trend we’ve seen grow over the last decade.

As lenders tightened their criteria after the global financial crisis, buyers needed greater equity and income to take out a mortgage.

So, over time, homeowners have gained greater stakes in their homes and the ability to absorb small price fluctuations, which is key in preventing a housing crash and keeping sales volumes healthy in 2023.

This is an important and underreported shift in enabling home moves, and one of the main reasons we continue to feel relatively optimistic in our housing market predictions for 2023.

It’s a property market ‘shakeout’, not a property market crash

Lower mortgage rates and house price falls will support sales volume

Current market measures – such as asking price reductions and buyer demand decreases – are pointing towards modest but widespread house prices falls of up to 5% in 2023.

Quarterly house price growth at lowest level since February 2020

However, price corrections combined with steadying fixed mortgage rates will support the number of sales completed in 2023, which we estimate will reach 1 million over the year.

It signals a return to more normal housing market conditions after 2 years of frenzied pandemic-driven activity.