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When will interest rates go down (or back up)?
On 1st February 2024 the Bank of England (BOE) kept the base rate at 5.25%, its highest level in 15 years.
When will interest rates go down? The market is pricing in that the Bank of England base rate will fall to 5% by July 2024 (down from its current level of 5.25%). By the end of 2025 it will have fallen to 3.74% before slowly falling to around 3.43% in 2029, as shown in the table below.
The BOE has raised the base rate 14 times since December 2021 in an attempt to reduce the UK's annual inflation rate, which has now fallen to 4%, down from a high of 11.1%. However, this is still above the target rate of 2% and unfortunately the UK inflation rate rose unexpectedly to 4%, up from 3.9% in November. The BOE has stated that it will not hesitate to raise interest rates further if inflation proves persistent.
Latest UK interest rate predictions
| Date | Interest rate predictions (Bank of England base rate) |
| February 2024 | 5.25% (actual) |
| July 2024 | 5.00% (predicted) |
| January 2025 | 4.43% (predicted) |
| January 2026 | 3.74% (predicted) |
| January 2027 | 3.49% (predicted) |
| January 2028 | 3.41% (predicted) |
| January 2029 | 3.43% (predicted) |
(data derived from Bank of England Overnight Swap rates)
The Bank of England will next meet on 21st March 2024 to decide what level interest rates should be set at. Below I explain what you should be doing now before going on to explain what will ultimately determine when interest rates will go down and how far they might fall. Bear in mind that the market's predictions of where interest rates will be in the future are not guaranteed.
Should you fix your mortgage rate now?
Over the last year lenders pulled hundreds of fixed-rate mortgage deals and raised the rates on their best mortgage deals as they grew concerned that the BOE may raise the base rate further. However, as inflation began falling, lenders began cutting their mortgages rates and the number of mortgages deals hit its highest level in 15 years. However, in recent weeks some of the major high street lenders have begun increasing their mortgage rates once again.
With the BOE base rate at 5.25%, the average 2 year fixed mortgage rate is around 5.59%. However the best rate, assuming a 60% loan to value, is much lower at 4.2%. Even if you are currently on a fixed-rate mortgage, where the fixed period isn't due to expire for another 6 months, it is possible to lock in a new rate now, which will start when your current fixed deal ends, avoiding any early redemption charges from your existing lender.
Historically the best fixed-rate mortgage deals quickly disappear as soon as there is any sign that the BOE might raise interest rates or as soon as the lender has acquired its desired number of customers. With mortgage rates no longer falling it's more important than ever to ensure you get the best deal possible. For example, the best two-year tracker mortgage rate is 4.99%, significantly higher than the current best two-year tracker rate of 4.2%. So you need to consider all of your options.
That's why I strongly recommend you speak to a mortgage adviser as soon as possible, who can look at all your options, including variable rate and tracker mortgages as well the increasingly popular option of an offset mortgages. They can also ensure that you secure the best deal even if mortgage rates begin falling during the mortgage application process. If you don't know a mortgage adviser whose opinion you trust, then follow these simple steps to get a free mortgage review*from a vetted FCA regulated mortgage professional:
- Click the link above
- Answer the four quick questions about your situation
- Enter your email etc
- Then select the "Review my Mortgage" button
It's as easy as that. Then an expert mortgage adviser will check if you are eligible to remortgagefor free and with no obligation.They will alsotell youpreciselyhow much you could save.Typically the free remortgage checksaves peoplearound £80 per month per £100,000 of mortgage.
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How the Bank of England base rate is set
The Monetary Policy Committee (MPC) is the nine-person committee, within the BOE, that determines the BOE base rate. Usually, every six weeks the Bank announces the MPC's interest-rate decision. You can find a full schedule of decision dates on the Bank of England website. Whenever a decision is announced the MPC meeting minutes are also published. These minutes are scrutinised by investors for any hints of when rates might go up or down in the future. For example, they would see how many of the nine-person committee voted for interest rates to go up, down or stay the same.
The forecasting of the Bank of England base rate has been transformed in recent years. The former Governor of the Bank of England (BOE), Mark Carney, originally created a notional link between the UK unemployment rate and the BOE base rate before replacing this with 18 economic indicators which still inform the BOE's interest rate decision making today, under current Governor, Andrew Bailey.
When does the market think mortgage rates will next rise or be cut?
The Bank of England has moved the goalposts numerous times, in recent years, on when interest rates will likely go up or go down. Of course, when interest rates rise or fall, mortgage rates will follow suit. Below is a short potted history to highlight how we have got to where we are today:
- Interest rates were slashed after the financial crisis in 2007/2008, from over 5% down to 0.5%, in order to support the UK economy.
- After much speculation that interest rates would finally go back up in 2015 this didn't happen because inflation suddenly turned negative. For an economy to attain a healthy level of growth the BOE aims for an official inflation target of 2%. Raising rates tends to send inflation lower, therefore the BOE left interest rates unchanged.
- The Brexit vote was a huge game-changer. The previous talk was all about when interest rates would go up. Suddenly the talk became concerned with the chance of an economic slump because the UK had decided to leave the European Union. The Bank of England was so concerned that it decided to cut interest rates from 0.5% to 0.25% in August 2016 and launch a new bout of Quantitative Easing (QE) to try and stimulate economic growth.
- Yet the UK economy proved surprisingly resilient after the EU referendum. It led some people, even the then Prime Minister Theresa May, to suggest that the BOE overreacted when it cut interest rates.
- The Bank of England finally raised interest rates in November 2017 for the first time in over a decade, back to 0.5%.
- Then in August 2018 the Bank of England raised the bank base rate from 0.5% to 0.75% as the economic outlook improved. This was the highest level in almost a decade.
- However, the arrival of the COVID-19 pandemic changed everything and the BOE carried out two emergency interest rate cuts in March 2020, first from 0.75% to 0.25% and then from 0.25% to 0.1%.
- Between December 2021 and August 2023 the BOE increased its base rate at 14 consecutive meetings, taking the base rate from 0.1% to 5.25% which is the highest level in over 15 years. The BOE is attempting to quell rising inflation which is now well above the BOE's official target of 2%.
- Since September 2023 the BOE has kept the base rate unchanged at 5.25%. The market is now pricing in that the BOE base rate will remain above 5% until August 2024 before starting to fall towards 3.43% in five years' time.
The indicators to watch that will determine when interest rates go up or down
The BOE uses a number of economic indicators when deciding whether rates will rise or be cut. So understanding the key economic indicators is important when judging when interest and mortgage rates are likely to rise or be cut. Below is a roundup of the most important indicators to keep an eye on.
- Inflation rose unexpectedly and remains above the official target – The annual UK inflation rate unexpectedly rose to 4% in December 2023, up from 3.9% in November 2023. The good news is that it has since stopped rising and remains at 4%. However that does mean that inflation is still well above the official 2% target rate (having been as high as 11.1% in October 2022) and the cost of living is much higher than a year previous. The BOE had previously suggested that the rise in inflation would only be temporary but it now accepts it got that wrong, which is why it raised interest rates fourteen times between December 2021 and August 2023. The BOE has said that it will raise interest rates further if inflation proves persistent.
- Official support for low rates has evaporated but the BOE is split – The MPC meeting minutes from February 2024 showed that the committee vote remained split. Two members voted for a 0.25% interest rate rise while six voted to keep the base rate at 5.25% and one member voted for a 0.25% rate cut. As it is a majority vote the bank base rate remained at 5.25%. This pause comes after fourteen consecutive rate hikes and while it could mark the peak for the base rate, the MPC warned that it would increase the base rate further if needed.
- The UK economy is now in recession – The accepted definition of a recession is when the economy shrinks for two consecutive quarters, a feat the UK achieved in the second half of 2023. It meant that the UK economy only grew by 0.1% for the whole of 2023. This is the weakest year for economic growth since 2009, if you ignore the 9.9% slump in 2020 which was the caused by the Covid pandemic. Weak economic growth reduces the chance of another interest rate rise while strong economic growth makes another interest rate rise more likely in order to avoid the economy overheating.
- Unemployment is falling – The number of people employed increased by 72,000 in the three months to January and the unemployment rate fell to 3.8%, which is the lowest level in a year. Strong employment numbers increase the chances of an interest rate rise as do rising wages, while weak employment numbers make interest rate rises less likely.
- UK economic growth forecasts are improving – In February 2024 the BOE upgraded its growth forecasts for the UK economy. It now predicts the UK economy will grow by 0.25% in 2024 (up from its previous prediction of 0%) followed by growth of 0.75% in 2025.
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What to do next
The ability to remortgage and/or fix your mortgage has become more difficult over recent years as the rules surrounding the affordability tests when applying for a mortgage were tightened leaving some borrowers stranded on their existing deals. It's important to calculate the impact of an interest rate rise and seek advice from a mortgage expert ahead of time by following the steps below.
Whether you are on a tracker mortgage, variable rate mortgage or looking to remortgage your existing fixed rate deal that is coming to an end the steps below will take you a few seconds, but could prevent your mortgage repayments crippling your finances in the future and help you secure a lower rate while they are still available.
Step 1 – Calculate the impact on your monthly mortgage payments
Quickly calculate the impact of an interest rate rise (or cut) on your mortgage payments with this interest rate rise calculator. Just enter the original details of your mortgage, such as the original amount borrowed and the original term to see how your monthly mortgage payments could change based on different interest rate rises.
So let's say you had borrowed £200,000 for 30 years at a variable rate of interest. In the calculator you would enter the original loan amount (£200,000 on a repayment basis), the original term (30 years) and the current rate of interest you are paying (let's assume 5.5%). The Bank of England base rate is currently 5.25%. So let's say you want to see the impact if the base rate increased by 0.5% (to 5.75%) you just enter 0.5% into the ‘anticipated rate change' box and click calculate.
The result shown below the interest rate rise calculator tells you that your current mortgage repayment would increase from £1,136 a month to £1,199 a month. That's an extra £63 a month that you'd need to find.
However, if you have a fixed rate mortgage deal then your monthly repayments won't increase if the Bank of England base rate rises, but you may be wondering how much higher your repayments will be when you come to remortgage. So let us assume the same numbers used above but with a fixed rate mortgage at 2.5% that is due to come to an end.
Then you would enter the terms of your original mortgage deal as before but would instead base the ‘anticipated rate change' figure on the difference between the Bank of England base rate at the time you took out your fixed rate mortgage (i.e. 0.1%) and where it is projected to be in the future when you come to remortgage.
So if you want to assume the BOE base rate will hit 6% you could set the ‘anticipated rate of change' to 5.9% (i.e. 6% – 0.1%). This would mean that once your fixed rate mortgage comes to an end and you remortgage, your monthly payments could increase from £790 a month to £1,524 a month. That's an extra £734 a month that you'd need to find.
Of course this is only a guide as to what your new mortgage repayments might be as it doesn't take into account the reduction in the size of your mortgage as a result of your previous monthly repayments or a fall in market interest rate expectations.
Once you have the result move on to step 2 below.
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Step 2 – The best wayto find out your mortgage options
Most consumers will wrongly assume that using apricecomparison site is the best thing to do when looking to remortgage. However, bear in mind
- many mortgage deals are only available viamortgage advisers so don't appear onprice comparison sites
- not everyone can get the rates quoted on price comparison sites
- price comparison sites don't take into account your credit rating or personal circ*mstances which will determinewhether a lender will actually lend to you. For example you may not be eligible for the deals quoted by comparison sites and won't find out until they credit check you. That in itself will then hinder future mortgage applications
That is why you are almost always better off dealingwith an independent mortgage adviser rather than going it alone. This is why 70% ofborrowers now use a mortgage advisertofind the best deal from a lender who will actuallylend to them. Therefore, we recommend getting in contact with a mortgage advisor yourself. You can arrange a free remortgage reviewusing this online tool*.
If you already have an independent mortgage broker that you trust then I suggest you get in touch with them as there has never been a better time to remortgage.
Further reading – should you fix your mortgage rate now
- ‘Should you fix your mortgage rate now?'
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