Mortgage Rates. Where are they heading?

In October, inflation experienced a significant decline, dropping to 4.6% from the previous 6.7% recorded in September, surpassing the predictions of many analysts who expected a decrease to either 4.7% or 4.8%.

This marked a substantial improvement compared to the same period last year when inflation peaked at 11.1%, achieving the government's target of halving inflation to 5% by the year's end.

High inflation has notably impacted mortgage rates, prompting homeowners to question whether relief is on the horizon. With the forecast indicating a continued decline in inflation over the coming months, the primary driver for the initial base rate increase is expected to diminish.

Analysts predict interest rates will be cut as early as May next year, falling to 4.25% by the end of 2024. Others suggest that interest rates will remain at 5.25% before a cut in the second half of the next year, projecting a base rate of 3% by late 2025.

The decline in inflation has implications for mortgages, as lenders often adjust fixed mortgage rates based on expected funding costs tied to predictions about the base rate. Market expectations, reflected in swap rates, show a decrease following the inflation data, with mortgage rates already being reduced by lenders in response to positive inflation and base rate outlooks.

Regarding the housing market, the lower-than-expected inflation in October is seen as good news. Falling mortgage rates may lead to increased activity as more people can afford to buy homes. Analysts suggest that falling mortgage rates could positively impact the share prices of UK housebuilders.

The expectation is that lenders might relax affordability rules, coupled with falling rates, boosting buyers' budgets. While mortgage rates are expected to fall further, they may not dip below 4% until later next year. There is anticipation of rate changes in the next few weeks before a slowdown during the Christmas period, with the possibility of sub-4% deals emerging in the second half of the following year, making it an opportune time for homebuyers.