Mortgage rates in the UK are shaped by economic factors, with inflation playing a central role in driving changes. When inflation rises, the Bank of England typically responds by increasing its base rate, directly influencing how much homeowners pay for their mortgages. International events and economic conditions within global financial markets can affect UK banks' costs when borrowing money to lend to homebuyers.

With inflation reaching 1.7%, below the 2% target set by the Bank of England, change is in the air for mortgage rates and prospective buyers. Let's dive into what the current interest rates are and what the future holds for the housing market.

What are the current mortgage rates?

In October, the average mortgage rate according to Moneyfacts was 5.40% for a two-year fixed deal and 5.07% for a five-year fixed deal. The cheapest two-year fixed rate is currently 3.87%, while the cheapest five-year fixed rate is 3.75%.

Remember that the rates can vary greatly depending on the type of mortgage you need. For example, first-time buyers' mortgages are designed specifically for those new to the property market. These often come with higher loan-to-value ratios, meaning you need a smaller deposit to get started. Many lenders offer incentives like cashback or free valuations, and you might have access to special schemes like Shared Ownership. However, these mortgages may come with slightly higher rates than standard mortgages.

Remortgages are for homeowners looking to switch lenders or get a new deal with their current lender. These often include attractive incentives such as free legal work or valuations. If you've built up equity in your property, you might find more competitive rates available. Many homeowners also use remortgaging as an opportunity to borrow additional funds for home improvements.

Moving home mortgages cater to those selling their current property and buying another. These mortgages might offer the option to port your existing mortgage to the new property. Rates can vary depending on whether you need to borrow additional funds, and you'll need to check if there are any early repayment charges if leaving your current deal.

Buy-to-let mortgages are specifically tailored for property investors and landlords. These typically require larger deposits, usually 25% or more of the property's value. Interest rates tend to be higher than residential mortgages, and lenders will assess your application based primarily on the potential rental income the property could generate.

When considering fixed-rate deals, they provide certainty in your monthly repayments for the chosen period. Two-year fixes typically offer lower initial rates but require more frequent remortgaging, whilst five-year fixes usually have slightly higher rates but provide longer-term payment stability. Remember that the best rates often come with arrangement fees that should be factored into the overall cost.

Your circumstances will influence the mortgage rates available to you. Lenders consider factors such as your deposit size (loan-to-value ratio), credit history, income and employment status, and the type and value of property you're purchasing. For the most up-to-date rates and deals suitable for your situation, you should speak with a mortgage adviser or check directly with lenders.

What’s the current Bank of England base rate?

The Bank of England's base rate currently fell to 5%, after having been previously maintained at 5,25% before the summer. This represents one of the highest levels in recent years, following a series of increases from the historic low of 0.1% during the pandemic.

The Bank of England has held the base rate at this relatively high level as a precautionary measure to combat inflation. Markets are watching closely for the next decision in November.

The BoE base rate is crucial as it serves as the benchmark for lending rates across the UK financial sector. Commercial lenders typically use it as a guideline when setting their interest rates for products like mortgages and loans, balancing the need to remain competitive while maintaining their profit margins and risk management strategies. This rate directly impacts mortgage rates, savings account returns, business loan costs and consumer credit pricing.

To find the best mortgage deal, it can be useful to speak to a financial advisor

How will mortgage rates continue to evolve?

The current economic landscape is providing positive signals for future mortgage rates. With inflation now at 1.7%, falling below the Bank of England's 2% target, there's growing optimism for rate reductions.

What are the short-term mortgage rate predictions?

The Bank of England's next decision in November could bring the first signs of change. With inflation now below target, the case for a base rate cut is strengthening. While mortgage rates typically follow base rate movements, they often lag slightly behind any changes, so the impact may take some time to filter through to consumers.

What are the experts saying?

Leading financial institutions have varying views on how far rates will fall. Goldman Sachs projects rates could drop to 2.75% by the end of 2025, suggesting a significant reduction from current levels and indicating strong confidence in economic stability. Santander predicts rates will reach 3.75% by Christmas 2025, adopting a more conservative stance. While more cautious, this still represents substantial relief from current rates and reflects a measured approach to economic recovery.

What does it mean for homeowners and buyers?

For existing mortgage holders, particularly those on variable rates, these predictions suggest potential reductions in monthly payments over the coming months. Those with fixed-rate mortgages may find better deals available when their current terms end. The November Bank of England decision will be particularly important as an early indicator of this trend.

For prospective buyers, lenders are likely to start offering more competitive rates, with fixed-rate products potentially improving in anticipation of future cuts. First-time buyers especially could benefit from improved affordability as rates decline.

What impact will these changes have on the UK housing market? 

These rate changes are likely to influence the broader housing market. Lower rates typically stimulate market activity, potentially supporting property values through improved affordability. The remortgage market is expected to become more active as better deals emerge, and a wider choice of mortgage products should become available.

While the difference between Goldman Sachs (2.75%) and Santander's (3.75%) predictions shows some market uncertainty, both suggest a clear downward trend. This indicates a potentially significant improvement in mortgage affordability over the next 18 months, though the exact path and timing remain subject to economic conditions.

Estimate your interest rate with our mortgage calculator

If you’re looking to buy a home through Shared Ownership, you can use our affordability calculator. This tool will give you an idea of what share you can purchase, what your monthly repayments would be and how much rent you'd need to pay on the remaining shares.