The Bank of England held its Bank Rate at 5.25% last month in a move that was widely expected by market experts. The Rate was also held in previous announcements since it rose to its current level in August 2023.
Having undergone 14 consecutive rises between December 2021 (when interest rates stood at just 0.1%) and last August , the Bank’s latest decision is further evidence that we may have reached the top of the rate-rise cycle. The next interest rate announcement will be on 1 February 2024.
The plateau in interest rates has largely been made possible by cooling inflation. The latest figures from the Office for National Statistics show that inflation stood at 4% in December. While this was a slight uptick from the 3.9% recorded in November, it’s a fall from October’s 4.6% and Sepetember’s 6.7%.
Mortgage costs first rocketed in the autumn of 2022 after former Prime Minister Liz Truss’ mini-Budget triggered market uncertainty and sent the pound crashing to historic lows. It caused mortgage lenders across the board to hastily pull deals, bringing them back to market at much higher prices.
While mortgage costs then underwent a downwards correction, in the spring of 2023 lenders began putting up the cost of deals again as Bank Rate continued on its relentless climb in the face of soaring inflation.
But, as inflation has cooled and interest rates have remained flat, the cost of fixed rate mortgages has been falling from its peak. Recent weeks have seen a flurry of lenders reducing costs for remortgagers, purchasers and buy-to-let landords, with many longer-term fixes now priced under 4%.
Average cost of popular deals
But how much can borrowers expect to pay overall?
According to our mortgage partner Better.co.uk, the average cost of a two-year fixed rate mortgage across all borrower types* today stands at 4.76%, with three-year fixed rate deals averaging 4.84%. Costs of five-year fixes average 4.39%.
The best two-year deal on the market is currently priced at 3.84%, while the leading three-year and five year deals stand at 4.40% and 3.79% respectively.
The average two-year tracker rate mortgage is priced at 5.66%, with the best in this category priced at 5.39%.
The typical standard variable rate (SVR) stands has falled to 7.78% from a high of 7.94% in October 2023, according to Better. In July of 2022, average SVRs stood at just 4.78%.
You can get up-to-speed with what might happen to mortgage rates this year with our 2024 forecast round up.
In terms of mortgage availability, as of 1 January 2024 there were 5,899 residential mortgage deals on the market, according to Moneyfacts. It marks a continued increase on the 5,694 recorded on 1 December as lenders reintroduce deals in a settling market.
Interest rates and mortgages
When the Bank Rate rises (or falls), it has an effect on the cost of mortgages.
There are an estimated 1.4 million homeowners (according trade body, UK Finance) on variable rate deals, such as trackers, whose payment will immediately either rise or fall if Bank Rate is adjusted.
If Bank Rate rose by 0.25 percentage points for example, a tracker deal priced at 6% would rise to 6.25%. This increase would add an extra £30 a month on a £200,000 loan taken over 25 years, with monthly repayments rising from £1,289 to £1,319.
Borrowers on fixed-rate deals, where the interest rate is locked are sheltered from changes to the Bank Rate.
However, when their deal expires – as will be the case for around 1.6 million borrowers in 2024 – new deals available are likely to be more expensive. You can work out the monthly cost of a mortgage against various interest rates with our Mortgage Calculator.
What’s happening with house prices?
The latest house price report from Halifax (published 5 January) reported that average prices were up 1.1% on the same time last year. On a monthly basis, prices rose slightly by 1.7% in December compared with November, taking the cost of the average home to £287,105. However, the lender forecasts falls of between 2% and 4% over the course of 2024.
Nationwide’s house price report (published 29 December) showed an average price fall of 1.8% in the year to December, although this was a slight improvement on the 2% annual fall posted the previous month. On a monthly basis, prices were flat in December compared to November. The lender puts the cost of the average home at £257,443 and expects prices to remain flat this year.
Why had interest rates been rising?
The Bank’s MPC uses interest hikes as a means of cooling the economy and taming rising inflation. The government’s target for the Bank of England is 2%.
The Consumer Prices Index (CPI) measure of inflation stood at 3.9% in the 12 months to November. This compares to a peak of 11.1% back in October 2022 but is nearly twice the Bank’s target.
Andrew Bailey, Governor of the Bank of England, recently noted: “There is no room for complacency. We need to be sure inflation returns to normal and we continue to take the decisions necessary to do just that.”
One of the main drivers behind soaring inflation has been the rising cost of energy. However, this has fallen in recent months, with the energy price cap, set by energy regulator Ofgem each quarter, reaching £1,834 on 1 October from its previous figure £2,074 (figures represent the annual bill of a typical household paying monthly by direct debit – actual bills are always determined by consumption).
However, the cap will rise by 5% – to £1,928 – from 1 January 2024, although it is expected to fall again once the winter period of peak consumption is over.
What mortgage deals are available?
Keeping track of mortgage costs is challenging – especially when rates can change on a daily basis. One simple way is use our mortgage tables, powered by Better.co.uk.
To find out what deals are available at today’s rates for the kind of mortgage you’re after, you’ll need to enter your personal criteria into the table below. Here’s what to do:
- Select whether the mortgage is to fund a house purchase or if it’s a remortgage for an existing property
- Enter the property value and the mortgage amount you require. This will automatically generate a percentage which is known as your ‘loan to value’. The lower your loan to value, the cheaper the mortgage rates available
- Tick the relevant box if it’s a buy-to-let or interest-only mortgage (you’ll need a repayment strategy in place for these deals), or if you’re looking for a mortgage to fund a shared ownership property
- Finally, filter your search by the type of mortgage you want, for example a two- or five-year fix or tracker. The filter is set to a complete mortgage term of 25 years but you can change this if required.
Here’s a live table of the mortgage deals available today.
What else do I need to know?
Mortgage deals offering the cheapest rates usually come with fees attached. You can opt to pay these upfront or add them to the loan. To factor in the cost of the fee, order your the results by ‘initial period cost’ (in the ‘sorted by’ dropdown).
Alternatively, you can order results by initial rate, lowest fee or monthly repayment – even by the lender’s ‘follow on’ rate that the deal will revert to at the end of the term.
The very cheapest are reserved for bigger deposit amounts, usually of 60% of the property value or more. And, in all cases, you will need a sufficient income and clean credit history to be accepted for a mortgage.
If you want to see what your monthly mortgage payments might look like in different scenarios while overlaid with household bills, our Mortgage Calculator will crunch the numbers.
When can I start a remortgage?
Once issued, mortgage offers tend to be valid for six months, although some lenders honour offers for up to 12 months. If you are looking to remortgage your current home, this means you can lock in a rate today – at no cost and with no strings attached.
How are average mortgage costs calculated?
*Average mortgage costs can vary between sources depending on how the data is gathered. Better.co.uk’s data refers to the average cost of a fixed rate mortgage recommendation that is created and issued to applicants over the last seven days from its panel of over 100 lenders.
The data counts remortgage and purchase loans but excludes SVRs, adverse credit, self-build and shared ownership. Data is collected at the end of each business day.
Better.co.uk targets applicants with a good credit history. Lower loan-to-values (under 85%) account for a significant portion of its business which can translate into cheaper loan rates.
Its average fixed rate costs may therefore appear lower than some others quoted on the market.