Introduction

When investors or new homeowners buy property in the UK, most of the time it is financed through a financial institution via mortgages—a type of loan given by the bank to the homeowner which they have to pay back with interest within a specific timeframe. The interest or mortgage rates will determine how much the remaining balance grows each month, and higher interest rates will create higher monthly payments. This is why a high interest rate is concerning for those who pay a variable rate mortgage, as they’ll see their interest rates increase. In the UK, mortgages are typically classified into two categories: fixed and variable, with the majority opting for fixed-rate mortgages.

This article will give new investors and homeowners a brief insight into the various factors that can affect mortgage rates in the UK, how mortgage rates have changed in recent years, and what the future holds for mortgage rates and real estate investments.

Various Factors That Influence UK Mortgage Rates

For property owners and prospective investors in the UK, it is crucial to understand the various factors that can influence mortgage rates, as this knowledge will be useful for making informed decisions when signing up for a mortgage policy.

1. The Bank of England: The Bank of England sets the base mortgage rates in the UK. The current rate is 4.25%, and all financial institutions in the UK must pay this rate to borrow money. The higher the bank rates, the higher the interest rates will be as well.
2. Investor’s Credit Score: The credit score is a personal factor that can affect mortgage rates, as it indicates your ability to make payments on time. Higher credit scores can qualify for lower mortgage rates, depending upon the bank from which they are obtained.
3. Loan-to-Value Ratio: The LTV is what lenders use to determine how much of a risk the borrower represents by analysing how much they have as a deposit against how much they have borrowed to date. It is also another personal factor, with lower LTVs allowing borrowers to secure more favourable mortgage rates.
4. Overall Market Conditions: Although current mortgage rates depend upon the base rate, the base mortgage rate depends upon the overall economic conditions of the UK, including inflation, tariffs, unemployment rates, and overall GDP. If mortgage rates are higher than average, that is a potential indicator of economic uncertainty.
5. Competitive Lender Rates: Financial institutions are competitive, and this is reflected in mortgage rates as well. Banks that are trying to get ahead of the competition will offer lower mortgage rates to attract more customers.
   

Mortgage Rate Movements in Recent Years (2020-2024)

Mortgage rates in the UK have changed in accordance with the Bank of England’s rate. The impact of the COVID-19 pandemic was evident in the Bank of England’s base rate at 0.1% throughout 2020 and 2021. The average mortgage rates around these two years were approximately 2.39% to 2.59%, leading to lenders withdrawing their high LTV mortgages and effectively limiting first-time buyers from the real estate markets during 2020. Despite the severity of the impact, house prices were largely stable throughout the UK, and those who were already on the property ladder sought out larger and more spacious homes as they took advantage of the low mortgage rates.

By 2022, mortgage rates were rising again, and 90% of high LTV mortgages had returned to the market. This led to mortgage rates rising steadily to 4.86% by the end of 2023.

The year 2024 saw a significant uptick in mortgage rates as the Bank of England raised the base rate to 5.25%. With political changes in 2024, housing became the main area of the UK’s growth strategy, with an ambitious target of 1.5 million homes being set for 2029, keeping pace with the demand for housing and rental units driven by the UK’s growing population.

Economic Indicators to Monitor in 2025: Where Are Mortgage Rates Heading?

The year 2025 is expected to be positive for mortgage rates in the UK housing market. Here are key indicators to monitor:

1. Economists predict further Bank of England rate cuts, with most expecting the base rate to fall from the current 4.25% to 4% in August 2025, and potentially to 3.75% by Christmas, allowing homeowners in the UK to see some relief on their mortgage bills.
2. Lower rate cuts also mean lower mortgage rates, creating increased demand for better and larger properties as higher mortgages become available at lower rates. However, the extent to which mortgage rates can fall will depend upon inflation levels. The Bank of England predicts that the inflation rate will rise slightly before dropping to around 2%.
3. Although the Labour government has committed to building 1.5 million homes, this may not include new first-time buyer schemes, although buyers can take advantage of existing first-home schemes.
4. Changes to Stamp Duty Land Tax from April 2025 indicate that housing properties worth more than £300,000 may see reduced demand as costs increase.
5. Mortgage lending is expected to grow, and if homeowners are considering re-mortgaging, 2025 remains an opportune time to do so.
   

Preparing for Changing Mortgage Trends

1. Consider refinancing and choosing a fixed-rate mortgage option, as these offer more predictable rates in the market. Consult with mortgage brokers to find the best deals in two-year or five-year plans and calculate mortgage loans to have a better understanding of where finances will stand.
2. Keep an eye on prominent economic indicators, such as Bank of England interest rates, to see how mortgage rates will change. Maintain a good credit score and try to save a larger deposit, as this can help secure better mortgage deals, especially in a fluctuating market.
3. Act early and take calculated risks, but always be aware of changing market conditions. Be proactive when it comes to understanding how mortgage rates will move and make informed decisions only after getting confirmed advice from a mortgage broker.