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