Article | Intelligent Investment

Forecasting mortgage rates in 2024 and beyond

February 26, 2024 6 Minute Read

By Michael McGill

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Mortgage rates are now past their recent peak. An 85% Loan-to-Value (LTV) 2-year fixed mortgage rate has come down from a peak of 6.35% in August 2023, to 5.03% in January 2024, according to the Bank of England. Recently, some major providers have begun to offer sub-4% mortgage rates, though predominantly for lower LTV products.

This may seem counterintuitive as the Bank of England base rate has remained stable over this period, but it reflects a fall in the swap rate. The swap rate is what lenders pay to financial institutions to obtain fixed funding for a certain period, and as a result dictates mortgage pricing more so than the prevailing base rate. If swap rates increase, mortgage rates will increase for lenders to maintain profit margins, and vice versa. The historic relationship between swap rates and mortgage prices can help predict the future path of mortgage rates.

Before the 2008 Global Financial Crisis, the swap rate and mortgage rate were closely linked and usually above the base rate. After the financial crisis, liquidity concerns and a greater level of perceived risk meant the gap widened, but in the last two years, the trend has reverted to norm, with rates converging again.

Over the next five years, we expect the relationship to continue in this way, and similar to the pre-2008 trend, with mortgage and swap rates remaining tightly linked and moving in tandem. However, unusually for the next three years, market projections suggest that swap rates, and consequently mortgage rates, will be in the a-typical position of being below the Bank of England base rate.

Figure 1: Base rate, 5-year swap rate and 5-year mortgage rate

Source: CBRE Macro House View Jan 2024, Bank of England

By Q4 2024, we expect the average mortgage rate on a 75% 5-year fixed product to fall to 3.82%, down from 4.86% in Q4 2023. Following on from this, we expect mortgage rates to continue falling over the next five years. The resulting improvements in mortgage affordability will help stimulate a recovery in housing market activity. However, the feed through to more affordable mortgage payments (for those purchasing a property) will be largely concentrated in 2024. This is because the expected return to house price growth from 2025 onwards will negate some of the impact of lower mortgage rates for home buyers.

Table 1 provides our forecasts for mortgage rates. It also shows the associated monthly mortgage payments for an average UK property price, based on our house price growth forecasts and assuming a 30-year mortgage term. It shows the monthly mortgage payment on a 75% LTV 2-year fixed rate mortgage will be £200 lower in Q4 2024 compared with Q4 2023. In the following year monthly payments are forecast to then fall by a smaller £60 as house price growth offsets any further fall in mortgage rates.

Table 1: Mortgage rate forecasts

Source: CBRE, ONS, Bank of England, Macrobond

Those taking out higher LTV mortgages will benefit from greater savings this year. The monthly mortgage payments with a 95% LTV 2-year fixed rate mortgage are expected to fall by 50% more (than the 75% LTV) at almost £300.

As we state in our latest residential forecasts, improvements in mortgage affordability will be the key driver of a recovery in transaction volumes and house prices in 2024. The significant forecasted fall of between 100 and 160 basis points in mortgage rates over the course of 2024 will provide quite a boost to activity. The last two occasions (before the Global Financial Crisis) that they saw a similar fall, mortgage approvals in the following year increased by an average of 11%. We believe there will be a similar recovery this time around. This would equate to around 65,000 more mortgage approvals, and a total of 642,000 mortgage approvals in 2024, up from 576,000 in 2023. This rebound in sales activity will underpin a recovery in house prices.

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