On 3 August 2023, the Bank of England increased the base rate by 0.25% to 5.25% – its 14^th consecutive rise since December 2021 and the highest rate we have seen in 15 years. As a result, homeowners, buyers, and investors alike are wondering what this means for mortgage rates. In this article, we delve into the factors influencing UK mortgage rates in 2023 and offer insights into what borrowers and potential buyers might expect in 2023 and beyond.

The current landscape: A brief overview

Over the past few years, the UK mortgage market has seen its fair share of fluctuations. Historically low interest rates were a defining characteristic from 2010 onwards, making borrowing costs much more affordable for homebuyers. This was particularly the case during the COVID-19 pandemic which prompted the Bank of England to drop its base rate to a record low of 0.1%, a move aimed at stimulating economic activity and encouraging borrowing.

However, since the rapid onset of the cost of living crisis in 2022, spiralling inflation (6.8% as of July 2023) has seen the Bank of England react with a steadily rising base rate in an effort to bring inflation back to its preferred rate of 2%. As a result, mortgage rates have also risen sharply over the past couple of years since lenders will generally set their rates in line with the base rate and any anticipated rises.

Following the most recent base rate rise on 3 August, average mortgage rates are as follows according to Uswitch, their highest levels since the financial crash in 2008.

So, what next?

The pace and sustainability of the UK's economic recovery will be pivotal in influencing mortgage rates in 2023 and beyond. The Bank of England's decisions regarding its base interest rate will also play a crucial role.

However, the relationship between inflation and mortgage rates is complex. While high inflation might typically lead to higher mortgage rates, other economic factors and policy decisions can counterbalance this effect. For instance, if the Bank of England believes that elevated inflation is transitory and not a longer-term trend, it might be inclined to employ accommodative policies again to support economic growth. Equally, we saw a fall in the average two-year fixed mortgage rate from 6.65% in October 2022 to 5.32% by May 2023 as the new Chancellor, Jeremy Hunt, reversed a number of controversial policy decisions outlined in the overambitious Truss- Kwarteng mini-budget of September 2022 in an effort to restore calm to the markets. Unfortunately, further base rate rises since May 2023 have prompted a jump in mortgage rates to the current levels that we see above.

Whilst there are indications that interest rate rises may peak soon, with an expectation that the base rate will increase to a high of around 5.75% by Spring 2024 – thankfully less than the originally anticipated 6% – homeowners will need to brace themselves for a much slower descent in mortgage rates and accept that rates are unlikely to hit the record lows which they became accustomed to in the 2010s. Indeed, mortgage rates are anticipated to stabilise at just under 4% over the next 5 years, significantly higher than the 0.1% we saw in 2021.

The housing market dynamics

The dynamics of the UK housing market itself can have an impact on mortgage rates too. If demand for housing remains strong, lenders might have more leeway to keep rates high. However, a significant slowdown in the housing market could lead to increased competition amongst lenders, potentially prompting some to lower their rates to attract more borrowers.

Whilst there is still a demand for properties, buyer numbers have dropped by 14% since 2022 according to property portal Zoopla. Sellers are also having to be more realistic about asking prices, with 42% of sellers having to drop their asking price by 5% or more to secure a sale.

Global factors and market sentiment

The global economic environment also plays a role in shaping mortgage rates. Economic events and policy decisions in major economies, such as the United States and the European Union, can indirectly influence the UK mortgage market. Global factors like trade tensions, geopolitical events, and changes in investor sentiment can create ripples that impact interest rates worldwide.

Market sentiment, both domestically and internationally, can lead to fluctuations in demand for government bonds, which in turn can influence mortgage rates. During periods of uncertainty, investors often seek the safety of government bonds, driving up their prices and pushing down yields. Mortgage rates, which are closely tied to these yields, can decrease as a result.

Advice for borrowers and buyers in 2023 and beyond

For borrowers and potential homebuyers, navigating the landscape of mortgage rates in 2023 and beyond requires a balanced approach. While the anticipation of rising rates in the short term might create a sense of urgency, it's essential to make well-informed decisions based on your financial situation and goals.

Stay informed about the economic landscape: Keep an eye on economic indicators, particularly inflation and interest rates, as changes in these metrics can provide insights into the direction of mortgage rates. Stay abreast of the Bank of England's monetary policy decisions and any indications of potential interest rate changes. These decisions can significantly impact mortgage rates. The next review is due on 21 September 2023.

Evaluate fixed vs. variable rates: You can lock in a new mortgage rate six months in advance of your current deal ending, so consider the pros and cons of fixed-rate and variable-rate mortgages to see which is right for you. Fixed-rate mortgages offer stable payments over the long term, while variable-rate mortgages will see a more immediate impact from a rise or fall in the base rate.

Consult experts: If you're unsure about the best mortgage strategy for your situation, consider seeking advice from financial advisors or mortgage brokers who can provide personalised guidance.

Factor in affordability: While focusing on mortgage rates, don't overlook other costs associated with homeownership, such as property taxes like stamp duty, insurance, and maintenance. Ensure that your overall budget remains manageable and keep track of the value of your existing and/or future property as this will have a big impact when it comes to your mortgage, as will the amount of equity you have and the size of your deposit.