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Mortgage rates are falling, but what does 2023 have in store?

Updated 24 March 2023

4min read

Craig Rickman
Senior Content Writer

Despite soaring above 6 per cent last autumn, fixed-rates mortgage deals are starting to improve.

But with interest rates predicted to continue rising this year, will mortgage rates follow suit? And how can borrowers choose the right deal? 

Mortgage rates are falling, but what does 2023 have in store?

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Anyone keeping close tabs on the property market may have noticed the tide starting to turn.  

After two and a half years of soaring growth, UK House prices have fallen four months on the bounce, including a 1.5 per cent drop in December, while mortgage approvals recently slumped to their lowest level since the pandemic emerged. 

The reason for this shift is mortgage rates, which is impacting buyer affordability. In October, the average two-year fixed rate hit 6 per cent for the first time in 14 years. 

Though rates have nudged down in recent weeks, and are forecast to continue falling throughout 2023, the picture is clearly unsettling.  

With things changing so quickly, it’s no wonder current and budding homeowners are finding it increasingly difficult to choose the right mortgage deal

Here we make sense of what’s going on. 

First, why are house prices falling? 

In short, because of higher mortgage costs. The Bank of England (BoE) has hiked interest rates nine times since December 2021 to its current level of 3.5 per cent (which was then raised to 4 per cent on 2nd February 2023).

With borrowing becoming more expensive, many prospective buyers are now priced out of homes they could previously afford. Between October and November last year, the number of UK mortgage approvals fell from 58,997 to 46,075 – a 20 per cent drop. 

And with demand shrinking, sellers are being forced to drop the asking price. 

Experts predict property valuations to continue dropping throughout 2023, with estimated falls ranging from 2 per cent to 20 per cent. Importantly, that’s without factoring in inflation which, despite easing slightly last month, remains above 10 per cent. This means some think prices could fall 30 per cent in real terms.

How much more will my mortgage cost me? 

According to Moneyfacts.co.uk, for home movers and those looking to remortgage, the best two-year fixed rate mortgage is 4.74 per cent, while the cheapest five-year fix is 4.39 per cent. However, to access these deals you need a maximum loan-to-value ratio of 60 to 65 per cent. 

As a reminder, with fixed-rate mortgages the interest payable remains constant throughout the term, which is typically two, five or ten years. Once the term expires, you roll onto the lender’s standard variable rate (SVR). Alternatively, you can find another mortgage product. 

Deals are less favourable for first-time buyers, who can access rates of 5.24 per cent and 4.84 per cent for two and five-year fixes, respectively. 

To highlight how much things have worsened for borrowers over the past year or so, in October 2021 the cheapest fixed rate was just 0.84 per cent. What’s more, 57 per cent of mortgages coming up for renewal in 2023 were fixed at rates below 2 per cent. 

Putting the impact into pounds and pence, data from the Office for National Statistics (ONS) found that on a £300,000 mortgage, borrowers could be paying up to £661 a month more once their current deal expires. The ONS reckons the average rise will be around £250 a month. 

Tracker rates, meanwhile, typically start cheaper than fixed ones. According to TotallyMoney.com, the best two-year and five-year deals are 3.74 per cent and 4.1 per cent, respectively.  

Trackers differ in that the level interest can change during the term. In most cases, rates are pegged to the BoE base rate; for instance, 0.50 percentage points above. If the BoE increases rates, which has been happening recently, your mortgage will become more expensive. 

Are mortgage rates expected to rise or fall during 2023? 

The consensus is that mortgage rates will gradually decline throughout the year, even if interest rates go up. Some predict that fixed rates could fall below 4 per cent by early 2024.  

The reason is because most lenders priced in higher future interest rates in response to then-chancellor Kwasi Kwarteng’s September mini-Budget proposals, which contained £50bn of unfunded tax cuts. This shook the mortgage market, with rates rising to levels not seen since the 2008 financial crisis. 

Rates have marginally reduced since – largely because current chancellor Jeremy Hunt reversed most of Kwarteng’s measures – and many lenders are still reviewing their prices. In early January, the Financial Times reported that TSB had slashed rates on its five-year fixed rate mortgages from 6.29 per cent to 4.99 per cent, while Nationwide cut rates 0.55 percentage points to 4.89 per cent.  

Is a tracker or fixed rate best for me? 

There is no straightforward answer here, unfortunately. Each has its pros and cons. 

As noted above, when interest rate rise, those on variable rate mortgages will see their mortgage payments increase immediately. And while many expect interest rates to continue going up this year, including when the BoE’s Monetary Policy Committee meets again in February, there is no guarantee this will happen.  

In addition, once UK inflation is finally under control - whenever that may be - there’s every chance interest rates will head back down. In this scenario, those on trackers would see their monthly repayments fall. 

Whether to opt for a fixed rate or tracker will largely hinge on your current and future affordability. If you have the financial capacity to cope with higher repayments, and are comfortable with the risks posed by this, then a tracker can work for you.  

However, for those who value certainty, fixed rates might be the better option as you know that your payments will remain constant for your chosen period. 

A further consideration is the term. Locking in for five years can be prudent from a budgeting perspective, but if rates drop in the future, you could miss out on cheaper deals. 

It’s worth adding that those with the highest loan to value ratios can typically access the best rates. Therefore, using any spare cash to reduce your outstanding mortgage can help keep repayments low. 

Who can help me choose the right product? 

Given the impact this could have on your current and future finances, it’s wise to explore and consider various options before choosing a product. Everyone’s situation is unique – it's about what’s right for you and your loved ones. 

The good news is this isn’t a decision you have to make alone. A mortgage expert will consider your personal circumstances, including current and future affordability, and recommend the most appropriate deal for your financial goals. 

Click below to connect with a regulated mortgage adviser today.

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About the author
Craig Rickman is senior content writer at unbiased.co.uk. He has been writing about personal finance and wealth management since 2016, including four years as a journalist at the Financial Times Group. Prior to this, Craig spent eight years working as a regulated financial adviser. He holds the CII level 4 Diploma in Financial Planning.