The recent decline in mortgage rates has brought a sigh of relief to borrowers, but concerns are mounting over whether this trend will last. With the Bank of England’s base rate expected to remain elevated throughout 2025, here’s what experts predict for the UK mortgage market as we step into January.
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Fixed-Rate Mortgages: Relief or Short-Lived Hope?
December offered a glimmer of hope to mortgage borrowers, with several leading lenders—including Barclays, Halifax, HSBC, NatWest, Santander, TSB, and Virgin Money—lowering their fixed-rate mortgage deals. This resulted in average five-year fixed rates dropping to 4.81% by mid-December, down slightly from 4.86% at the start of the month. Two-year fixed rates also fell marginally from 5.09% to 5.06%.
While these reductions mark an improvement from the earlier months of rising rates, the outlook remains uncertain. The recent uptick in inflation—confirmed as increasing for the second consecutive month in November—has cast doubt on whether this downward trend will persist.
“For those seeking fixed-rate deals, it’s prudent to act now,” says Sarah Coles, head of personal finance at Hargreaves Lansdown. “Market expectations of fewer rate cuts through 2025 suggest we may see fixed mortgage rates edge higher again.” Borrowers with pending remortgages may benefit from locking in current rates, knowing they can still explore better options if rates fall further.
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Diverging Trends: Risk-Based Pricing Persists
While most borrowers welcomed the cuts, not all deals followed suit. Lenders raised rates on products tailored for first-time buyers or borrowers with smaller deposits. These groups, deemed higher risk, saw fewer rate reductions, reflecting lenders’ cautious stance amid economic uncertainties.
“This hold in the base rate will likely keep mortgage rates stable in the near term,” explains Justin Moy, managing director at EHF Mortgages. “Lenders are focusing on competitive positioning for the new year rather than significant rate cuts.”
Tracker Mortgages: A Tale of Frustration
Borrowers with tracker mortgages or those paying their lender’s standard variable rate (SVR) face continued challenges. Expectations for multiple base rate cuts in 2024 were scaled back, with only two reductions materializing in August and November. Looking ahead, market forecasts for 2025 anticipate just two additional cuts, down from six earlier predictions.
Laith Khalaf, head of investment analysis at AJ Bell, notes, “Inflationary pressures have tempered the Bank of England’s appetite for aggressive rate cuts. The market’s adjusted outlook reflects this caution, further dampening hopes for substantial relief in borrowing costs.”
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February: A Potential Turning Point?
Economic data and inflation trends remain pivotal in shaping monetary policy. The Bank of England’s decision to keep the base rate at 4.75% in December aligns with a cautious approach, despite three of nine policymakers voting for a cut.
Key drivers include mixed signals from the economy: a surprise contraction hinted at potential rate cuts, but stronger-than-expected wage growth and an inflation uptick tempered optimism.
David Hollingworth, associate director at L&C Mortgages, suggests, “February could see the first base rate cut of the year, especially if economic conditions warrant a boost. However, any reductions will likely be measured and gradual.”
What’s Next for Borrowers?
With the market poised for a competitive start to 2025, lenders may continue to tweak rates to attract new borrowers. However, a clear consensus is emerging: the era of rapid rate cuts is over, replaced by incremental adjustments influenced by persistent inflation and economic uncertainty.
For borrowers, staying proactive remains key. Securing deals early can offer a hedge against potential rate hikes, while monitoring the market ensures opportunities for better rates are not missed. As January unfolds, the interplay of inflation, base rate decisions, and lender strategies will set the tone for the months ahead.
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