Trends Analysed by Tom Bill, Head of UK Residential Research at Knight Frank
As the year goes on, individuals transitioning from their two-year fixed-rate mortgage plans from early 2022 might feel less discomfort from higher rates.
Last week’s economic figures were unsurprising yet reassuring.
Data released on Wednesday indicated a slightly bigger drop in core inflation than predicted, while inflation in services proved more persistent. The headline inflation rate came in a bit lower than expected at 3.4%.
Subsequently, the Bank of England held interest rates steady at 5.25%, an expected maneuver.
Since the UK’s property market is still recovering from a sluggish 2023, uneventful news was likely welcomed. Last year, high mortgage rates and persistent inflation led to a 20% decline in property transactions and a 5% decrease in average prices by September.
Optimism increased in the last quarter as headline inflation dropped rapidly, with financial markets initially anticipating five rate reductions of 0.25% in 2024. However, these predictions have tempered to about three cuts due to sustained underlying inflation.
The economic data presents conflicting signals, potentially causing disagreements between buyers and sellers regarding pricing, as discussed previously.
So, what level of financial strain will materialize by the end of 2025 due to borrowers coming off older, more favorable fixed-rate mortgages?
This graphic, based on Knight Frank’s examination of mortgage data, suggests an answer.
The data spans purchases and re-mortgages, analysing the monthly share of fixed-term deals and their average rates. We’ve also speculated on a range of rates across various loan-to-value (LTV) ranges.
Our analysis shows that some borrowers coming off their two-year fixed-rate plans, signed during early 2022 when interest rates began to rise, are due to renew at the start of this year. The average two-year mortgage rate (75% LTV) rose from 1.57% to 6.18% across 14 rate hikes from December 2021 to August 2023.
The anticipated share of all fixed-rate re-mortgages initiated with rates below 2% is predicted to decline from 45% in February to 26% by December of this year.
By late 2024, most sub-2% deals up for renewal will be five-year plans from 2019, with the remainder being three or four-year plans. These sub-2% five-year rates will phase out by mid-2027.
Despite the influx of financial strain, we expect UK housing prices to grow by 3% this year due to improved stability in the mortgage market.
Additionally, as the year progresses, more borrowers will obtain new rates that are similar or better than what they had, particularly those who chose two-year fixed rates during the rates surge post the mini-budget in September 2022.
By end of 2024, mortgages agreed at rates over 4% will represent a fifth of all renewing fixed-rate deals. By the end of 2025, this number is estimated to grow to 33%.
The rise in deals below 3.5% expiring in the second half of 2025 is due to fewer two-year mortgages being signed during the same period in 2023, as variable rates gained popularity with borrowers speculating a peak in bank rates and five-year plans remained favoured for their long-term security amidst rate fluctuations.
Preferences have since shifted, notes Simon Gammon, head of Knight Frank Finance. Two-year fixed mortgages are trending once more, with borrowers drawn by the small difference in rates compared to five-year fixes and the chance to secure mortgages with rates possibly starting with a ‘3’ in two years.
The gradual entry of financial pressure into the market, rather than a sudden drop, is one reason we don’t foresee a sharp fall in property prices. Fixed-rate mortgages, which constituted over 90% of mortgages before the pandemic, will cushion the transition. The improved financial strength of lenders relative to 2008/09 will also help in preventing extensive foreclosures.
Still, the upcoming period will introduce several difficult moments for those securing new, higher-rate mortgages, as the graphic indicates.
