Mortgage lenders are becoming more risk averse as a rising number of homeowners struggle to keep up with their mortgage repayments – but will mortgage rates go down?

Banks are becoming more strict with mortgage lending criteria as the number of people falling behind with their mortgage rose during the first three months of 2023.

Mortgage lenders expect this trend to continue going forward and, as a result, they plan to tighten their credit scoring criteria.

They will also reduce lending to people with smaller deposits, according to the latest Bank of England Credit Conditions Survey.

Mortgage lenders cited the changing economic outlook and a reduced appetite for risk for their increased caution, as well as the slowdown in the UK housing market.

The tightening comes at a time when demand for mortgages is expected to rise to a near-two-year high, particularly among people remortgaging.

But there is still good news if you’re wondering whether mortgage rates will go down.

The interest charged on fixed-rate mortgages has recently fallen to a six-month low and there is a wide range of mortgage products to choose from.

Why are mortgage lenders tightening their criteria?

Household budgets have been impacted by the combination of the cost-of-living squeeze and rising interest rates.

The Bank’s Monetary Policy Committee (MPC) has increased the Bank Rate by 4.15% since December 2021, adding around £446 a month to mortgage repayments for someone with a £200,000 mortgage.

The cost-of-living crisis and these higher mortgage rates have impacted some people’s ability to afford their monthly mortgage payments.

And in turn, it’s making lenders more cautious about lending.

But despite some problems in the US and European banking sectors, lenders are not anticipating a wider credit crunch such as that seen during the global financial crisis.

Buyers with smaller deposits to be most impacted by tighter mortgage criteria

Mortgage lenders have indicated that the drop in mortgage availability will have the biggest impact on home buyers with smaller deposits and homeowners with smaller equity in their properties.

There will be the biggest decline in mortgage lending to those with house deposits or equity of 25% or less, while there may be a slight reduction in lending to people with higher stakes in their home.

Understanding your loan-to-value ratio

Despite this, the availability of mortgages for people with a 10% deposit will only reduce slightly.

Mortgage lenders also expect no change in the number of mortgage applications they approve.

This is a significant turnaround from the final three months of 2022 when lenders were much more picky about who they lent to.

Number of available mortgage products recovers to pre-mini budget levels

While banks are tightening their lending criteria, there’s no need to be alarmed if you’re buying or remortgaging.

The number of mortgage deals available has recovered to the same level as before the mini budget in October 2022. This includes more than 500 mortgages on offer for people with a 10% deposit.

Average mortgage rates have also continued to come down, despite increases to the Base Rate, with the typical cost of fixed rate deals recently falling to a six-month low.

The biggest decision will be whether to opt for a fixed rate mortgage, for which the interest rate stays the same for the term, or a tracker one, where the interest you pay moves up and down in line with the Bank Rate.

Will mortgage rates go down?

Average mortgage rates in the UK are currently:

  • 4.48% for a tracker mortgage

  • 5.32% for a two-year fixed rate mortgage

  • 5.00% for a five-year fixed rate mortgage, although sub-4% mortgage rates are available if you shop around.

Back in February, the cost of a two-year fixed rate mortgage was 5.44% while the cost of a five-year fixed rate mortgage was 5.20%.

And in January these mortgage rates sat at 5.79% and 5.63% respectively, showing that mortgage rates have gone down over the first few months of the year.

Our Director of Research Richard Donnell thinks that fixed mortgage rates will be at 4-4.75% throughout 2023.

“We expect fixed rate mortgage rates for new business to sit between 4% and 4.75% for much of 2023. This is low by historic standards but means the average buyer will face an increase of £200 to £500-a-month more in mortgage repayments than at the start of 2022, when mortgage rates were much lower.”

Which type of mortgage is right for you?

If you take out a tracker mortgage, your monthly repayments will increase if the MPC increases interest rates again. But you could also see them fall if the MPC starts to cut the official cost of borrowing.

If you prefer the certainty offered by a fixed rate mortgage, you will need to decide whether to fix for two years or five.

Mortgage calculator: work out your mortgage repayments

Five year deals are currently cheaper than two year ones, but interest rates are thought to be close to peaking. If mortgage rates start to come down, you’ll be locked into the rate for longer.

Whatever you decide to do, it’s a good idea not to stay on your lender’s standard variable rate for too long as these currently average a mortgage rate of 7.12%. This is the rate you automatically revert to when your current deal ends.


Key takeaways

  • Banks are tightening their mortgage lending criteria as more homeowners struggle to keep up with their mortgage repayments
  • Mortgage lenders plan to tighten their credit scoring criteria and reduce lending to people with smaller house deposits
  • But interest rates for fixed mortgages are going down and have reached a six-month low, while there is a wide choice of available mortgage products
  • The average cost of a five-year fixed rate mortgage is now 5.00%, down from 5.63% in January 2023
  • The average cost of a two-year fixed rate mortgage is now 5.32%, down from 5.79% in January 2023