The UK Mortgage Market in Flux: Rate Cuts, Rising Costs, and What’s Next for Borrowers

As the end of 2024 approaches, the UK mortgage market finds itself at a pivotal moment. With inflation dropping to a favourable 1.7%, there’s growing optimism for a double interest rate cut by the Bank of England before Christmas. But while hopes for lower interest rates brighten, lenders are simultaneously raising mortgage rates, signalling an end to the recent mortgage price war.

Inflation Drops, Rate Cuts on the Horizon?

The Bank of England has held the base rate steady at 5% in recent months. However, a promising drop in inflation to 1.7% has prompted speculation about a potential rate cut before the end of the year. If the central bank reduces the base rate to 4.75% or even lower, it could relieve existing mortgage holders and potentially ignite renewed interest from prospective homebuyers. Such a move would help offset increased borrowing costs and offer much-needed stability in a fluctuating market.

Rising Mortgage Rates: What’s Driving the Increases?

Even as the Bank of England is expected to ease rates, lenders like NatWest, Santander, and TSB have raised mortgage rates on various fixed-rate products by up to 0.3%. This comes in response to the recent rise in UK gilt yields, which underpin the cost of fixed-rate deals. For example, NatWest’s five-year fixed rate on a mortgage with a 40% deposit is now set to climb above 4%, impacting affordability for many buyers. This upward shift in mortgage costs means that even with potential rate cuts, affordability remains a pressing concern for homeowners and prospective buyers alike.

The End of the Mortgage Price War?

The recent rate hikes from multiple major lenders suggest an end to the competitive price cuts that have marked much of the past few years. Previously, lenders had been reducing rates to attract borrowers amidst a competitive market. However, this latest move signals that the era of sub-4% deals may be behind us, at least for now. Rising costs in fixed and tracker mortgages may deter some buyers, particularly those with smaller deposits, and could prompt a shift towards more cautious, budget-conscious lending practices.

What’s Next for Borrowers?

For borrowers, the coming months will require strategic financial planning. With potential rate cuts in the pipeline but mortgage rates climbing, now is an essential time to consider refinancing options or locking in current rates before additional increases. The situation is a balancing act between capitalising on lower central bank rates, should they arrive, and mitigating risks from the current lending climate.

The inflation drop to 1.7% indicates that the Bank of England's measures have been effective, potentially allowing for a relaxation in the base rate. Lower inflation reduces pressure on borrowing costs and increases household purchasing power, which could help both buyers and existing homeowners. If the Bank cuts rates, we might see increased consumer confidence, benefiting the housing market overall.