2024 has been a complicated year for the UK economy. Following 2023’s cost of living and mortgage crises, the better part of the year has been spent on speculation over when (and by how much) the Bank of England would cut interest rates to combat rising inflation. In August this year, the bank’s Monetary Policy Committee finally came together to reduce the Bank of England’s Bank Rate from 5.25% to 5%. But, while this came as welcome news to those struggling against inflationary pressures, the path towards more stable mortgage rates by 2025 may not be a straightforward one. This is especially true in the wake of the general election, as the new Labour government prepares to tackle the country’s uncertain economic future.
As we enter the final quarter of 2024 and prepare for the Labour government’s first budget on 30th October, an idea of what mortgage rates could be like in 2025 becomes clearer and clearer. As such, our team has put together a forecast of 2025 mortgage rates based on insights and information pulled from across the UK’s economic landscape.
Will next year bring another 2023-style mortgage crisis? Or will rates continue to fall to more manageable levels? For your sneak peek into the future of lending, look no further than Concept Capital Group.
What Have the Past Few Years Done to Mortgages?
Mortgage rates are dependent on interest rates and inflation, meaning the Bank of England’s bank rate is highly influential in determining the deals offered by lenders.
In response to the economic impact of the 2020 COVID pandemic, the Bank of England started raising interest rates to reduce inflation. Originally intended to lower the pressure households faced from increasing living costs, this rate increase only intensified over subsequent years. From its first hike in December 2021 to August 2023, the Bank of England increased the bank rate from 0.25% to 5.25%. While this has had a marginal impact on inflation, the UK continued to struggle through poor economic growth, heavy debt and a rising cost of living, culminating in 2023’s recession.
In 2024, the Bank of England’s decision to lower its base interest rate to 5% and then hold that rate has only intensified speculation within the market. And, though mortgage rates have shown early signs of stabilisation, many stakeholders still find themselves priced out of homeownership and property investment opportunities by inflated mortgage offers.
3 Major Influences on 2025’s Mortgage Rates
While mortgage rates are still up in the air and subject to speculation, a handful of recent economic events may influence the direction in which they trend.
1. Falling Inflation May Curtail Mortgage Rates
According to an economic mortgage lending forecast published by EY earlier this year, economic recovery will gain momentum in the second half of 2024 and early 2025 due to falling inflation boosting household spending power and easing the high interest rates seen in 2023. More specifically, EY forecasts that the total number of bank loans to UK businesses and households will experience a modest growth of 1.7% this year, paving the way for a more significant acceleration in economic recovery in 2025.
Though the Bank of England’s recent decision to hold at a bank rate of 5.0% could fly in the face of EY’s forecast, other metrics suggest that the falling rate of inflation, however gradual, could still impact mortgage rates in 2025. The UK’s performance in the first quarter of this year suggests that economic stagnation could be lifting, as activity surveys showed an increase in consumer confidence and a reduction in inflation, energy prices and interest rates. This suggests that an economic rebound prompted by interest rate reductions could become increasingly likely and impactful in 2025-26. Moreover, the Bank of England’s governor noted that interest rates are “gradually on the path down”, with the decision to hold the bank rate at 5% being the result of inflation stalling at 2.2%.
Though weaker-than-usual economic growth is still a factor, inflation itself could already be on the descent. In the press release issued by the Bank of England’s Monetary Policy Committee following the vote to maintain the Bank Rate at its current level, the unwinding of global shocks that initially drove up inflation and the resulting fall in headline inflation were both cited as reasons for a less intensive stance on monetary policy. As such, falling inflation alone could trickle through to mortgage rates by 2025.
2. Convergence of the Swap Rate and Mortgage Rates in 2025
Mortgage rates may soon trend downwards due to their being increasingly linked to the Bank of England’s falling swap rate.
A swap rate is a special kind of interest rate used in the calculation of fixed payments in an interest rate swap between two parties. Both parties would agree to exchange interest rate cash flows based on a designated amount. Before the Global Financial Crisis of 2008, swap rates and mortgage rates were closely linked and typically above the base rate. When the crisis struck, however, concerns about the liquidity and risk involved in lending caused the gap between swap rates and mortgage rates to widen.
According to CBRE analysis, the dearth between swap rates and mortgage rates has been narrowing and normalising in the past two years. This normalisation should continue over the next five years, allowing a return to pre-2008 financial trends where mortgage and swap rates have an almost direct link. This will, in turn, llead to a rising number of mortgage lenders offering lower rates throughout 2025, which will positively influence the housing market in turn.
3. National Debt at an All-Time High
The future of mortgage rates is not all silver linings and bright skies. Budgetary issues within the UK government may exact enough pressure to keep interest rates high and inflation mounting as the Labour government sets out to ease its financial burden.
Aside from the recent controversy surrounding the apparent £22 billion hole in public finances the Labour government inherited from the Conservatives, the economic outlook for the next five years is less than ideal. Despite the Bank of England’s interest rate cuts this year, Britons may still contend with a collective £19 billion increase in mortgage costs before the end of 2025. Likewise, the prospect of tax and welfare changes being a major feature of Labour’s October budget is expected to damage consumer spending recovery. According to an article by the Guardian, headline consumer confidence fell sharply in August, with concerns over Labour’s budgetary decisions being a major cause.
Perhaps most concerningly, Office for National Statistics (ONS) data shows that the government’s outstanding debt pile reached 100% of gross domestic product in August, the highest level since 1961. This represents a difference between public sector spending and income of around £13.6 billion, an increase of £3.3 billion since the same period last year. So far, the economy has stalled unexpectedly for the past two months despite predictions of a post-election bounceback, signalling that there may be leaner times than anticipated in 2025. This could not only prompt further austerity measures but also cause interest rates and inflation to climb again, inevitably sending mortgage rates to more historic highs.
What Can I Expect From Mortgage Rates in 2025?
Ultimately, it isn’t easy to reach a firm conclusion on interest rates at this point. Financial markets suspect that a final interest rate cut could manifest before the end of the year, which could set up 2025 mortgage rates nicely. Other industry experts also believe that the Bank Rate could fall to 3.5% by the end of 2025, which would hopefully be enough to stimulate economic growth.
For now, it may be enough to anticipate a more stable and positive economic environment in 2025 as the Bank of England and Labour work to rectify some of the more pressing problems still impacting the UK economy.
Mortgage-Free Property With Concept Capital Group
At Concept Capital Group, we offer a mortgage-free alternative to traditional property investment that uses modularly constructed real assets to provide easy, cost-effective social housing to the growing number of low-income and vulnerable tenants in need of permanent accommodation. As experts in alternative real asset investments, our team will manage your property on your behalf with no hidden fees and no Stamp Duty. For property investors uncertain about the state of mortgage rates, a Concept Capital Group investment could be the ideal solution.
For more on our mortgage-free investment opportunities, book a call with our team today.
