It would require a mighty base rate cut if it's to happen…
The base rate cut by the Bank of England, though not unexpected, has caused lots of excited chatter about the direction of travel for interest rates over the coming year, with much focus on how quickly that all important percentage figure will drop. Speculation has been rife about rates tumbling below 3%, but prominent industry commentator Nicholas Mendes (pictured left), from London broker John Charcol, believes that’s a hope too far.
“While some may speculate on rates falling to 3% or lower, this appears unlikely, as it would require the Bank Rate to drop significantly to around 2.5%,” Mendes reasoned. “That said, affordability should continue to improve as lenders adjust their pricing in response to falling swap rates and increased market competition. In the short term, fixed-rate mortgage deals are expected to continue their gradual decline, following the market’s expectations for falling interest rates throughout the year. However, the extent of these reductions will depend on movements in swap rates and lender competition.”
Mendes suggests that one key trend to watch is the likely inversion of the usual rate structure, with two-year fixed rates expected to fall below five-year fixes from Q2 onwards, and remain lower for the rest of 2024. “By the end of the year, the most competitive 60% LTV two-year fixed rates are projected to be around 3.5%, with five-year fixes slightly higher at approximately 3.6%,” he observed. “For borrowers with a 75% LTV, rates are likely to settle around 3.65% for a two-year fix and 3.75% for a five-year fix.”
Mendes is cautious about the possibility of another base rate cut soon, pointing out that it depends on upcoming economic data and the balance between inflation risks and weak economic growth.
“While headline inflation has fallen to 2.5% as of December, wage growth remains stubbornly high at 5.6%, raising concerns that inflationary pressures could resurface if demand picks up too quickly,” he noted. “At the same time, the UK economy has been struggling, with GDP flatlining over the past six months. Demand remains weak, and lower borrowing costs could provide much-needed stimulus to investment, consumer spending, and business confidence. This economic backdrop has led markets to anticipate rate cuts, as reflected in falling UK government bond yields.”
Another key factor is global uncertainty, Mendes suggests, particularly with potential trade disruptions stemming from Donald Trump’s policies, which could weaken the pound and push up import costs, adding inflationary pressures. “Given these factors, the Bank of England must carefully balance the need to support growth with the risk of reigniting inflation,” he said. “While rate cuts are expected later this year, the timing of the first move will depend on how wage growth, productivity, and broader economic conditions evolve in the coming months. If economic data continues to show stagnation, more substantial cuts could come sooner rather than later to help boost business confidence.”
Read more: Mortgage rates war enables brokers to shine for clients
Could growth in UK mortgage lending double this year?
Meanwhile, new research, from the ITEM Club, a non-governmental economic forecasting group, sponsored by Ernst & Young LLP, suggests that growth in UK mortgage lending will double throughout 2025 - up from 1.5% in 2024 to 3.1% in 2025, and grow to 3.2% in 2026, as rates fall and consumer confidence rises. Its forecast takes into account the HM Treasury’s model of the UK economy.
Darren Deacon (pictured centre), head of intermediary sales at Family Building Society, responded that the phrase he is most often hearing about the market is ‘cautiously optimistic’. “The number of new properties coming to market is 11% ahead of the same start-of-the-year period last year, as is the number of sales being agreed,” Deacon observed. “The Stamp Duty threshold changes from April 1st are also giving a boost to the start of the year which is also helping to drive an increase in house prices by an expected 2-4%. The government’s ambition to build houses and reform planning will help drive the housing market with further activity, but it is too soon to say if this will have a noticeable effect across 2025.”
Deacon believes that mortgage advisers can capitalise on improving conditions. “Irrespective of how the market performs in 2025, with many five- and two-year fixed terms coming to an end this year, there remains a big opportunity for brokers,” he said.
His colleague Alistair Nimmo (pictured right), head of marketing, at Family Building Society, concurs regarding the forthcoming changes to Stamp Duty, suggesting it is inevitable that this will lead to a jump in transactions in the first quarter of 2025. “Whether this results in an easing of demand in the following three to six months, as occurred in the wake of previous Stamp Duty changes remains to be seen,” he said. “The data from Ernst & Young suggests not, and that mortgage demand will continue, however that’s providing we don’t see any real economic shocks.”
