Mortgage rates play a crucial role in the property market, influencing homebuying decisions and the overall economic landscape. In this article, we will explore the mechanics behind mortgage rates, factors influencing them, and consider the likelihood of rates coming down in the future.

How do mortgage rates work?

Mortgage rates represent the interest that lenders charge borrowers for home loans. These rates fluctuate based on several factors, including:

1. Economic Indicators:

Key economic indicators such as the Bank of England Base Rate, inflation, employment rates, bonds yields and Gross Domestic Product (GDP) growth, impact mortgage rates. Lenders assess these indicators to determine the level of risk associated with lending money.

What is inflation?

You may have heard this mentioned in the news. Inflation is the rate of change in the consumer price of goods and services. It’s most commonly measured using the Consumer Prices Index (CPI) and the Retail Prices Index (RPI). It compares the price of consumer goods in the current year with the previous year.

So how does inflation impact mortgage rates? The Bank of England takes into consideration inflation when deciding interest rates. Previously when inflation has gone up then interest rates have also tended to increase.

2. Credit Scores:

Borrowers' credit scores play a significant role. Individuals with higher credit scores often qualify for lower mortgage interest rates as they are considered less risky to lenders.

In addition to your credit score personal factors such as your deposit, income and assets can also affect what mortgage rates are available to you.

3. Loan Terms:

The length of the loan term also affects mortgage rates. Generally, shorter-term loans have lower interest rates compared to longer-term ones.

Are mortgage rates likely to come down in 2024?

When the Bank of England’s Monetary Policy Committee met in December 2023, they stated that the interest rate is expected to remain around 5.25% until Autumn 2024 and then decline gradually to 4.25% by the end of 2026.

Predicting future mortgage rates is challenging due to the multitude of economic factors and market conditions. Although some mortgage lenders have started cutting mortgage rates, predicting future rates remains uncertain. Staying informed about economic trends and regularly monitoring market conditions can help individuals make informed decisions about their home financing options.