'I'm a mortgage expert - here's what I think will happen to interest rates this year'

With inflation falling closer to its two percent target and potential interest rate cuts in sight, a mortgage broker has expressed cautious optimism that things could finally be looking a bit more positive for the housing market.

Market analysts foresee these as possibly the final months of a 16-year high Base Rate, potentially making loans more affordable and bolstering consumer confidence. The question remains: to what extent?

Nicholas Mendes, mortgage technical manager at independent mortgage brokers John Charcol, said: “By the end of 2024, I anticipate the Bank of England will implement two rate cuts of 0.25 percent each, with a possibility for a third cut, reflecting an optimistic outlook for the UK economy.

“These measures are expected to stimulate growth, enhance consumer and business confidence, and maintain inflation targets, setting the stage for a robust economic recovery and financial stability.”

What will happen to mortgage rates in the second half of 2024?

According to Mr Mendes, the expected cuts in the Bank of England's Bank Rate are already reflected in current fixed-rate mortgage pricing.

However, he noted: “As the Bank Rate decreases, the market is likely to gain more confidence in the prospect of further reductions, potentially leading to additional cuts in fixed mortgage rates by around 0.5 percent this year.

“This trend could provide substantial relief to homeowners and prospective buyers, making borrowing more affordable and stimulating activity in the housing market.”

How low could mortgage rates fall by the end of 2024?

Mr Mendes expects spread between two-year and five-year fixed mortgage rates to narrow, with headline five-year fixes potentially falling to 3.75 percent and two-year fixes to four percent by the end of 2024.

He explained that the decline is driven by anticipated Bank Rate cuts and growing market confidence in continued rate reductions.

Mr Mendes said: “As lenders adjust their offerings in response to lower funding costs and increased competition, we could see even more attractive mortgage deals.”

What will happen to mortgage rates in 2025?

In 2025, Mr Mendes predicts that mortgage rates will fall further, likely by around 0.5 percent.

He said: “This continued decline will be influenced by the ongoing reduction in the Bank of England's Bank Rate and the stabilisation of economic conditions.

"As confidence in the economy grows and inflation remains under control, lenders will have more room to lower rates, resulting in even more competitive mortgage products.

“This downward trend in mortgage rates will not only make homeownership more accessible but also stimulate the housing market by encouraging both purchases and refinancing. Consequently, we can anticipate increased activity in the housing sector.”

Should tracker mortgages be considered?

With the lack of certainty teamed with expectations of a falling Bank Rate, many households drawing to the end of their mortgage may be considering a tracker deal.

However, Mr Mendes urged: “Those coming to remortgage over the next year should generally avoid tracker rates unless they specifically need a product with no Early Repayment Charges (ERC).

“Fixed rates already incorporate the anticipated rate cuts, making them likely to offer better value for at least another year. In addition to potentially lower costs, fixed-rate mortgages provide the added benefit of predictable monthly payments, which can significantly aid in budgeting and financial planning.

“For most homeowners, opting for a fixed-rate mortgage will be the more advantageous choice in the current economic climate.”

At what point might a tracker rate start to become a viable option?

Mr Mendes said: “it is difficult to see tracker rates becoming a viable option for at least another year. The market anticipates further rate cuts, which will likely cause fixed-rate pricing to fall in advance of the actual rate reductions.

“Consequently, fixed rates will remain more attractive in the short term, offering better value and stability. However, once the cycle of rate cuts stabilises and if future economic indicators suggest that rates have bottomed out, tracker rates could become more appealing.

“This shift might occur when fixed rates no longer significantly undercut tracker rates and the potential for further rate cuts diminishes, providing an opportunity for borrowers to benefit from lower rates if the Bank of England starts to raise rates again in the future.”