What next for mortgage rates - and how long should you fix for?

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Fixed rate mortgages look set to rise again after the cost of Government borrowing soared to its highest level for more than a quarter of a century.

Rates had been expected to fall this year due to expectations that the Bank of England will cut the base rate three or four times.

But now, rising gilt yields have thrown mortgage rate reductions into question.  

The yield on 30-year gilts hit 5.4 per cent today, the highest it has been since 1998. Meanwhile, the yield on a 10-year gilt went up to 4.88 per cent - the highest level since the financial crisis.

This has been partly triggered by a global bond sell-off and Labour's Budget plan to borrow and spend more. 

This troubled Government debt markets, sending interest rate expectations and gilt yields higher ever since.

It is also having an impact on Sonia swap rates, which reflect lenders' expectations of future interest rates and play a critical role in how fixed-rate mortgages are priced.

> Best mortgage rates calculator: Check the deals you could apply for 

Mortgage rates: what is happening

The Bank of England opted to hold the base rate at its current level in December, meaning interest rates finished the year at 4.75 per cent. They have slid 0.5 percentage points since August when they were first cut from 5.25 per cent.

Between the start of July and October, the lowest five-year fixed rate mortgage fell from 4.28 per cent to 3.68 per cent. Meanwhile, the lowest two-year fix fell from 4.68 per cent to 3.84 per cent.

But the lowest rates are now higher at 4.07 per cent and 4.2 per cent, respectively, as rates have crept higher again with all of the best sub-4 per cent deals disappearing.

Nonetheless, mortgage rates remain well below their recent peak. 

In 2023, a combination of base rate hikes and worries over inflation figures saw average two-year fixed mortgage rates reach a high of 6.86 per cent in the summer, according to Moneyfacts, while five-year fixed rates hit 6.35 per cent. 

That said, mortgage rates still remain far higher than borrowers had enjoyed prior to the surge in 2022.

Less than three years ago, the averages were hovering around 2.5 per cent for a five-year fix and 2.25 per cent for a two-year. 

In fact, as recently as October 2021, some of the lowest mortgage rates were under 1 per cent.

Will mortgage rates go down? 

Mortgage borrowers on fixed rate deals should worry less about where the base rate is today, and more about where markets think it will go in the future. 

This is because banks tend to pre-empt base rate movements. Lenders change their fixed mortgage rates on the back of predictions about how high or low the base rate will ultimately go and how long it will stick there.

Last year, forecasts for where the base rate would eventually peak fell from a high of 6.5 per cent to 5.25 per cent, mortgage rates shifted with this.

At the start of 2024, markets were pricing in six or seven base rate cuts in 2024, with investors betting on rates falling to 3.75 per cent or 3.5 per cent by Christmas.

And we now know how that ended up. Base rate ended the year at 4.75 per cent.  

Markets are now suggesting that base rate will fall to 4 per cent by the end of this year - but based on last year's performance, these should all be taken with a pinch of salt.

Read More

Interest rate rise or fall mortgage calculator - how much it will cost you

Mortgage pricing: a rough guide

Mortgage market expectations are reflected in something known as Sonia swap rates. 

These are agreements in which two counterparties, for example banks, agree to exchange a stream of future fixed interest payments for a stream of future variable payments.

Mortgage lenders enter into these agreements to shield themselves against the interest rate risk involved with lending fixed rate mortgages over a period of time.

For example, if a bank lends a mortgage fixed for five years, it wants to have some certainty on what it will cost to fund that over the time period, rather than being dependent on shifting interest rates and potentially being caught out by big unexpected moves.

Put simply, swap rates show what financial institutions think the future holds concerning interest rates.

Swaps have been rising over the past month and fixed rate mortgages, by and large, have yet to follow suit.

As of 6 December, five-year swaps were at 3.8 per cent and two-year swaps were at 4 per cent. 

But as of 14 January, five-year swaps were at to 4.28 per cent and two-year swaps are at 4.41 per cent.

This means that the lowest fixed rate mortgages are currently below their equivalent swaps - something that is incredibly rare.

Why did mortgage rates go up?

Mortgage rates first began to increase towards the end of 2021, when inflation started to rise, resulting in the Bank of England increasing base rate to try and combat it. 

The Bank uses the base rate to try to keep inflation to its 2 per cent target. The aftermath of the Covid lockdowns, combined with Russia's invasion of Ukraine in February 2022, triggered a huge inflation spike. Central banks were caught on the hop and rushed to try to rein this in with higher interest rates.

Mortgage rates accelerated after the Liz Truss-Kwasi Kwarteng mini-Budget in late September 2022. The pound tumbled after Kwarteng, announced a wave of unfunded tax cuts that unsettled bond markets.

After Truss resigned in October 2022, new Chancellor Jeremy Hunt reversed nearly all of the mini-Budget announcements. The markets calmed down and the cost of borrowing fell with mortgage rates dropping too. 

But following a fresh round of stubbornly high inflation figures in late spring 2023, markets began betting the base rate would peak at 6.5 per cent.

This triggered a summer inflation panic and led to mortgage lenders whacking their rates up again.

Inflation watch: Inflation has risen to 2.6% and continues to creep above the bank of England's 2% target

Once the inflation worries subsided, interest rate expectations eased substantially but inflation proved stickier than expected in 2024 and the Bank of England ended up holding base rate at 5.25 per cent.

With inflation finally returning to its 2 per cent target, the Bank finally felt comfortable cutting rates to 5 per cent at its August 2024 meeting.

Base rate was cut again to 4.75 per cent by a vote of 8 to 1 at the November Monetary Policy Committee meeting.

The ONS since revealed that inflation rose to 2.6 per cent in the 12 months to November - above what the Bank of England was forecasting causing the central bank to hold fire on its latest 

Most economists and personal finance experts think the Bank of England will proceed cautiously from here.

> Five crucial Bank of England charts on interest rates and inflation

What will happen to house prices? 

The typical home increased in value by around £12,000 last year, according to Nationwide Building Society.

It said the average house price rose by 4.7 per cent over the course of 2024, increasing from £257,443 to £269,426.

However, Nationwide says prices remain just below the all-time high recorded in summer 2022, before mortgage rates spiked.

Prices have risen consecutively for the past four months. December saw a 0.7 per cent per cent monthly rise, after taking account of seasonal effects, following a 1.2 per cent increase in November.

The recent spike in prices is linked to buyers trying to beat the stamp duty changes taking effect from 1 April this year.

Recovering: House prices ended 2024 on a strong footing, up 4.7% compared with December 2023, though prices were still just below the all-time high recorded in summer 2022

These changes will increase the costs of buying for both first-time buyers and home movers.

The price at which stamp duty starts to be charged will revert back to £300,000 for first-time buyers, from its current level of £425,000. 

For first-time buyers, it would mean that instead of paying no stamp duty on a purchase worth £425,000, they will pay £6,205.

Home movers currently pay stamp duty if their home costs more than £250,000, but from 1 April, this will drop back to £125,000 - the level it was at before temporary changes were made in the 2022 mini-Budget.

Nicky Stevenson, managing director at national estate agent group Fine & Country said: 'December continued to defy expectations, with house prices continuing to rise despite the usual seasonal slowdown. 

'This reflects strong demand as buyers moved quickly to secure deals ahead of the April 2025 stamp duty threshold changes, driving growth both monthly and annually.'

What next for interest rates?

Starting in December 2021, the Bank of England attempted to combat rising inflation by aggressively upping interest rates. In the space of just 20 months, base rate went from its record low of 0.1 per cent to its recent peak of 5.25 per cent, reached in August 2023.

At that point rate hikes stalled and gradually sentiment on inflation shifted.

Now the central bank is keeping a keen eye on inflation, but also looking out for any disinflationary factors, such as an uptick in unemployment or downturn in economic growth.

Markets are now predicting the central bank will cut rates three times next year to 4 per cent by the end of 2025. 

But as is to be expected, interest rate forecasts vary and are constantly changing.

The most bullish forecasters on rate cuts have base rate coming down to as low as 2.75 per cent by the end of 2025, with Goldman Sachs analysts announcing this rate forecast in autumn last year.

At the more reserved end of the spectrum, Santander revealed it expects interest rates to fall to 3.75 per cent by the end of this year.

Meanwhile, economists at Capital Economics think the base rate will fall to 3.5 per cent by early 2026.

They had previously forecast that interest rates would fall to 3 per cent by the end of next year, but have concluded that rates will now fall slower as a result of the Labour's first budget.

New forecast: Capital Economics (CE) has changed its interest rate forecast because it now thinks the Bank of England will cut rates more slowly as a result of the budget

Paul Dales chief economist at Capital Economics said: 'We already thought that the Bank's inflation concerns would mean it continues to cut rates by 25basis points every quarter until mid-2025. 

'But in the light of the Budget, we have revised up our own GDP and core inflation forecasts. 

'And as a result, we no longer think the pace of rate cuts will quicken in the second half of 2025 and we now think rates will fall only as far as 3.5 per cent in early 2026 rather than to 3 per cent.' 

Looking even further ahead than late 2025 and early 2026, economists vary on where they think interest rates will level off.

Santander, for example, thinks interest rates will remain between 3 per cent and 4 per cent for the foreseeable future.

Capital Economics is predicting that base rate will level off at 3.5 per cent. 

Oxford Economics is predicting that base rate will eventually fall to 2.5 per cent in 2027 where it will broadly remain throughout 2028 and 2029. 

Should you fix for two or five years? 

The majority of mortgage borrowers are opting for two-year fixed rate deals, according to recent analysis by Santander.

Over the last three months of 2024, it said 65 per cent of customers opted for a two-year fixed, compared to 27 per cent choosing a five-year. 

This represents a big shift, given that in recent years, Santander says its customers have tended to show a 60/40 split in favour of five-year fixes. 

Hedging their bets: Many borrowers are opting for two-year fixed rate deals in the hope that interest rates will have fallen by the time they come to refinance

Choosing what length to fix for depends on what you think may happen to interest rates but should importantly take more account of what your personal circumstances are.

Key factors include whether you may move soon, how much you prefer the security of fixed payments for longer and how well you could cope with a rise in mortgage bills.

Fixed rates of any length offer borrowers certainty over what their payments will be from month-to-month. 

Those opting for a shorter two-year fix are backing interest rates falling over the next couple of years, or at least staying steady, so that when it is time to remortgage their bills won't rise.

With five-year fixes borrowers are locking in to rates that they know won't change for longer, perhaps either because they believe rates may rise or because they prefer the security. Five-year fixes were hugely popular when rates were lower.

If rates continue to fall, a tracker mortgage without an early repayment charge could put borrowers in a position to take advantage.

However, for all the potential benefit, a tracker product will also leave people vulnerable to further base rate hikes in the meantime while also being more expensive than fixed rates at present.

Whatever the right type of mortgage for your circumstances, shopping around and speaking to a good mortgage broker is a wise move.

For a full rate check use This is Money's mortgage finder service and best buy tables. These are supplied by our independent broker partner London & Country.  

What are the best mortgage rates?

Bigger deposit mortgages

Five-year fixed rate mortgages 

NatWest has a five-year fixed rate at 4.07 per cent with a £1,495 fee at 60 per cent loan to value.

HSBC has a five-year fixed rate at 4.09 per cent with £999 fees at 60 per cent loan to value.

Two-year fixed rate mortgages 

HSBC has a 4.2 per cent two-year fixed rate deal with a £999 fee at 60 per cent loan-to-value. 

Santander has a two-year fixed rate at 4.21 per cent with a £749 fee at 60 per cent loan to value.

Mid-range deposit mortgages

Five-year fixed rate mortgages 

NatWest has a five-year fixed rate at 4.18 per cent with a £1,495 fee at 75 per cent loan to value. 

Principality Building Society has a five-year fixed rate at 4.2 per cent with a £1,395 fee at 75 per cent loan to value.

Two-year fixed rate mortgages       

Santander has a two-year fixed rate at 4.29 per cent with a £749 fee at 75 per cent loan-to-value. 

Yorkshire Building Society has a two-year fixed rate at 4.3 per cent with a £995 fee at 75 per cent loan to value. 

Low-deposit mortgages

Five-year fixed rate mortgages 

Nationwide Building Society has a five-year fixed rate at 4.64 per cent with £999 fees at 90 per cent loan to value.

HSBChas a five-year fixed rate at 4.69 per cent with £649 fees at 90 per cent loan to value. 

Two-year fixed rate mortgages 

Yorkshire Building Society has a two-year fixed rate at 5 per cent with a £1,495 fee at 90 per cent loan to value. 

Nationwide Building Society has a two-year fixed rate at 5.04 per cent with £499 fees at 90 per cent loan to value. 

 >> Check our our mortgage tracker to compare the latest available deals  

Tracker and discount rate mortgages 

The big advantage to a tracker mortgage is flexibility. The downside is they are currently more expensive, so it will take a few more interest rate cuts before borrowers starting beating the fixed rate deals.

The can sometimes be the case with discount rate mortgages, which track a certain level below the lenders' standard variable rate.  

A fixed-rate mortgage will almost inevitably carry early repayment charges, meaning you will be limited as to how much you can overpay, or face potentially thousands of pounds in fees if you opt to leave before the initial deal period is up.

You should be able to take a fixed mortgage with you if you move, as most are portable, but there is no guarantee your new property will be eligible or you may even have a gap between ownership.

Many tracker deals have no early repayment charges, which means you can up sticks whenever you want - and that suits some people.

Make sure you stress test yourself against a sharper rise in base rate than is forecast. 

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