Mortgage rates are expected to peak this summer, as inflation begins to fall and swap rates – the rates banks pay to borrow money – also decline.

The last six weeks have seen mortgage rates rise quickly towards 6%, impacting both buyers and sellers in the housing market. Some buyers, cautious about taking on higher rate mortgages, have stepped back and demand has fallen by 18% in the last two months. This marks a turnaround from the first half of the year, when rates were edging towards 4% and sales increased.

What happens in the housing market for the rest of 2023 all hinges on what happens with mortgage rates. Our Executive Director – Research, Richard Donnell, says: ‘Higher mortgage rates have hit home buyer demand, but the impact is not uniform across the country. Southern England is set to experience above average price falls, while some areas may not post any.’

When will mortgage rates go down?

Inflation is now coming down and is currently running at 7.9%, compared with the recent high of 11.1% in October 2022. The Bank of England has stated that it expects it to fall significantly further this year because:

  • Wholesale energy prices have fallen significantly
  • The price of imported goods is falling as production difficulties ease
  • Reduced spending power means less demand for goods and services in the UK

That means it now looks less likely that the Bank of England will need to raise rates as much as financial markets expected just a few weeks ago.

We believe mortgage rates are likely to peak this summer, because swap rates – the rates banks pay to borrow money – have fallen by 0.6% over the last 3 weeks. Swap rates are based on what the markets think the interest rate will be in the future.

Right now, the average mortgage rate for a 5-year fixed rate at 75% loan to value has reached 5.4%, compared to 4% in the Spring. The reduction in swap rates will take time to feed through into mortgage rates, but they could fall below 5% this autumn. That said, there is a risk that mortgage rates may remain higher for longer as the Bank of England works to get inflation back down to 2%.

What does all this mean for house prices?

Higher mortgage rates are having a detrimental effect on house prices, particularly in the south of England where homes are more expensive. However, the decline in buyer demand is not as marked as that seen in the wake of the mini budget. Overall, it’s running at 6% below 2019 levels. When looking at the picture year on year, demand is 40% lower than it was this time last year. That said, the number of actual sales being agreed is only 17% lower, as buyers and sellers currently in the market remain committed to moving home.

Southern England, where the average house price is over £300,000, is being hit hardest in terms of prices. House prices here are falling by up to 0.6% year-on-year. However in the Midlands, Northern England, Wales and Scotland, where properties are cheaper, the picture is brighter and homes are registering growth of over 1% year-on-year. In Scotland, homes are up 2%.

On average across the UK, house price inflation is currently running at just 0.6%, whereas this time last year it was running at 9.6%.

First-time buyers are also feeling the strain of higher mortgage rates, weakening demand at the bottom end of the housing ladder.

‘Weaker buyer demand will push down prices over H2 2023,’ says Donnell. ‘We expect modest price falls over the coming months, with UK house prices expected to fall by up to 5% over 2023. This would mean that prices are still 15% higher than at the start of the pandemic. Even if mortgage rates fall back into the 4-5% window later this year and into 2024 H1, we expect house price growth to remain very low for the next 1-2 years.’

Key takeaways

  • Mortgage rates are set to peak this summer and look likely to return to 4-5% this autumn
  • However, there is a risk that rates may stay higher for longer
  • Higher mortgage rates have hit buying power in the south of England hardest