Is it time to fix? UK mortgage trends and predictions

Millions are feeling the strain of the cost of living crisis, including higher mortgage rates.

As interest rates have risen sharply to bring down soaring inflation over the past few years, the resulting higher mortgage rates have added more pressure to the monthly budgets of millions of UK homeowners. 

We’ll take a closer look at what's going on in the mortgage market and examine how things could change in the future. 

One question you may be asking yourself right now is whether now is the right time to fix your mortgage rate. Let's weigh up your options.

What’s happening with UK interest rates?

According to data from Forbes, while mortgage rates have experienced some reductions throughout the year, two-year and five-year fixed rates still stand at far higher levels than they have reached over the past few years.

The Bank of England (BoE) maintained a base rate of 5.25% between August 2023 and August 2024 (a 16-year peak) when it cut the base rate by 0.25%, effectively reducing it to 5%. 

However, the higher base rate led to significantly higher borrowing rates for first-time buyers and those looking to remortgage.

Some investment professionals believe the base rate could be cut to 4% or 3% by the end of 2025, although this remains to be seen.

Linked mortgages, such as base rate trackers, mirror interest rate fluctuations, while the cost of many new fixed-rate deals have factored them in already.  

However, it’s not just high mortgage rates that are an issue for homeowners, as the base rate underwent 14 consecutive increases from December 2021 to August 2023, increasing vastly from just 0.1% to 5.25% during this period.

While the UK government's decision to slash stamp duty rates and the BoE’s most recent interest rate reduction has brought some comfort for house buyers concerned about affordability, persistently high interest rates present a bigger obstacle.

Learn more: what to do if you can't remortage due to affordability

Fixed-rate mortgage predictions

Mortgage brokers have noted an increasing number of homeowners opting for longer-term fixed-rate mortgages, in an attempt to try and ensure stability in their home finances. 

Borrowers tended to pay more to fix in for longer historically, but mortgage rates have been falling, and so fixed-rate mortgages really are worth exploring. 

In fact, long-term mortgage deals are currently competitive – with only 0.35% interest separating a two-year fix from a five-year fix.  

Although interest rates are expected to fall in 2025, persistently high interest rates seen over the past few years mean it may still be best for buyers to think long-term when selecting their mortgage. 

Why did interest rates rise?

The BoE’s Monetary Policy Committee (MPC) used interest rate hikes to control inflation, which is currently 2.2%, down from the over 40-year high of 11.1% in October 2022.

The Consumer Prices Index (CPI) was 2.2% in the 12 months to August 2024, unchanged from July.

What are the mortgage rate predictions for the next five years?

When interest rates go up, so do mortgage rates, and vice versa.

According to data from Pound Forecast, the current two-year fixed mortgage rate is 4.68%, while the five-year fixed rate is 4.24%, both based on 75% loan to value (LTV).

The organisation’s predictions for five-year fixed mortgages show the potential for consistent interest rate decreases.

Rates are projected to fall to 3.49% in December 2024, to 2.63% by December 2025, and to 2.0% by September 2026. Forbes notes the average cost of a two-year fixed mortgage currently stands at 4.75% across all borrower types and is also projected to decrease over the next few years.

Ultimately, predicting the UK’s mortgage rates for the next five years is a challenging task, especially in light of the past two years’ record high inflation and stagnant economic growth.

However, most experts currently agree interest rates will fall gradually over the coming years, which is in line with forecasted future bank rate reductions.

In short, these trends mean mortgage holders may see more fixed rates at under 4% over the coming years, helping to relieve some persistent financial pressure borrowers have experienced recently.

Borrowers will fix for longer

When taking a closer look at mortgages between 2021 and 2024, it’s interesting to note more borrowers have been taking out plans stretching longer than the typical 25 years.

And although this increases interest, homeowners are finding their monthly payments are significantly less.  

With experts now advising borrowers to opt for longer fixed-term plans, such as five-year fixed plans at or below the 4.75% interest rate average, the industry may continue to see more borrowers choosing longer term fixed plans to counteract the costs of persistently high inflation rates.

Should you fix your mortgage for 2, 3, 5, 10 years, or longer?

If you have a low loan-to-value (the size of your mortgage as a percentage of your property value) then you will almost certainly benefit from fixing, as you will be able to secure a low fixed-interest rate.  

Now, of course, the longer your fixed term, the longer you are locked into a lower interest rate.

Although there is no limit to how many times you can remortgage, if you decide on a long fixed-term period, there will likely be exit penalties and early redemption fees if you want to repay your mortgage or move.  

These factors need to be traded off against the cost of exiting your current deal (which forms part of the overall cost of remortgaging) and the certainty that a fixed-term mortgage provides. 

Longer-term fixed-rate mortgage deals are a recent development in the mortgage market, with some providers even offering up to a 40-year fixed-rate mortgage.

These have a higher rate but offer certainty and stability over the amount you will pay long-term. And these longer mortgages also remove the effort and cost of needing to remortgage every few years.  

Fixed vs variable rate-mortgage: what’s the difference?

As the name suggests, fixed-rate mortgages ensure your interest rate is fixed, say, for five years, and when your fixed-rate period ends, you will then move onto the lender’s higher standard variable rate (SVR).  

On the flip side, if you take out a variable rate mortgage, then the interest rate would typically rise and fall at the mercy of the lender throughout the lifetime of the mortgage. But you could benefit from a lower mortgage rate, depending on the individual deal.  

Homeowners need to be diligent at the moment, and ensure that they are living within their means.  

The stamp duty reduction and recent removal of mortgage stress-testing criteria should offer some much-needed help on the affordability front.

However, homeowners need to budget, research and do their due diligence before choosing their mortgage. 

Get financial advice

With UK mortgage rates expected to gradually decline over the next five years, experts suggest that borrowers can expect to see more fixed-rate mortgages at 4% or less in the long term. 

However, if you opt for a fixed-rate deal with a locked-in interest rate, your interest repayments will not fluctuate, regardless of whether the base rate rises or falls in the future.

Let Unbiased match you with a qualified mortgage broker or a financial adviser to learn more about fixed-rate mortgages and if they can help you secure the right mortgage.