A pattern of predictability has emerged, offering a glimpse into the future of the UK housing market as we advance into 2024 and beyond.
With core inflation subtly declining and the Bank of England maintaining the bank rate at 5.25%, the housing market’s path appears cautiously optimistic, especially after a subdued 2023 characterised by high mortgage rates and persistent inflation that led to a significant downturn in transactions and average prices.
The Mortgage Rate Landscape
The steady bank rate comes at a pivotal time for the UK housing market, which is showing signs of recovery. Initial expectations for rate cuts in 2024 have been adjusted in light of ongoing inflation, affecting predictions and potentially causing friction between buyers and sellers over property prices. A critical question looms: What will be the financial impact by the end of 2025 as borrowers transition from fixed-rate deals secured under more favourable conditions?
Insights into Mortgage Renewals
Analysis from Knight Frank sheds light on the upcoming shifts. It highlights that a considerable number of borrowers are currently moving away from two-year fixed-rate deals secured at the start of 2022, just as interest rates began their upward trajectory. This period marked the beginning of a series of rate increases that elevated the average rate on a two-year mortgage (75% loan-to-value) from 1.57% to 6.18%.
This trend suggests a decrease in the proportion of all fixed-rate mortgages being renewed, where the initial rate was below 2%, from 45% in February to 26% by December. By the end of 2024, the focus will shift towards renewals of five-year mortgages from 2019, with sub-2% deals expected to phase out by mid-2027.
The Future of UK Housing Prices
Despite the anticipated increase in financial strain, the stability within the mortgage market is projected to support a 3% increase in UK housing prices this year. This stability is partly due to a significant number of borrowers securing new rates on similar or improved terms later this year, a reaction to the rate spike following the mini-budget in September 2022.
By the end of 2024, mortgages agreed upon at rates above 4% will represent a fifth of all fixed-rate mortgages due for renewal, increasing to 33% by the end of 2025. This change is attributed to a decrease in the proportion of two-year deals initiated in the corresponding period in 2023, as borrowers opted for variable-rate mortgages in anticipation of a peak in the bank rate.
Market Stability and Mortgage Choices
The preference for two-year fixed mortgages has seen a resurgence, driven by the narrowing gap between two-year and five-year fixes and the desire among borrowers to benefit from potentially lower rates in the near future.
The introduction of financial strain is expected to be gradual, preventing a sharp decline in house prices. The widespread adoption of fixed-rate deals over variable rates before the pandemic, along with the financial resilience of lenders compared to the 2008/09 crisis, should mitigate the risk of large-scale foreclosures.
Conclusion
While the UK housing market faces a period of adjustment and challenge, the overall outlook suggests stability and cautious optimism. Borrowers navigating higher-rate mortgage renewals will face difficulties, but the gradual nature of these changes, combined with strategic financial planning, may soften the impact as the market adjusts to the evolving landscape of mortgage rates and economic conditions through 2025.
Photo by Lina Kivaka
