Mortgage Interest Rates Held at 5.25%

December Mortgage Interest Rates Update

Interest rates held at 5.25%: here’s what it could mean for mortgages

The Bank of England (BoE) has announced it will hold the Base Rate at 5.25% again this month. This follows the same decision as in September and November, when the Base Rate was held after 14 consecutive rises.

The Bank had been raising interest rates to tackle high levels of inflation, which was in excess of 10% in early 2023 – way above the government target of 2%. The Government sets the Bank a target of 2% inflation, and was working towards lowering it to 5% by the end of the year.

But in November, it was announced that inflation had fallen sharply in the month to October, to 4.6%. This fall made it look more certain that interest rates would be held, as it was a good indicator that the Bank’s plan to tackle inflation was working, without further Base Rate rises being required.

The Bank needs to strike the right balance between lowering inflation and keeping the wider economy healthy. Today’s announcement – a third consecutive hold – shows the Bank’s belief that its plan to tackle high inflation is working.

What’s happened to mortgage rates recently? Base Rate was held at 5.25% in September and November, and we’ve seen mortgage rates edge down through this period. This was the 20th week running we’ve seen mortgage rates decrease.

The average 5-year fixed rate has fallen from 6.08% in July to 5.07% this week, and the average 2-year fixed rate has fallen from 6.61% in July, to 5.48%. You can check the current average mortgage rates for different terms and deposit sizes here, which we update weekly.

Swap rates – which dictate the underlying costs of mortgages for lenders – have continued to fall, particularly since the drop in inflation we saw last month. Which has fed through to lenders becoming more competitive with the rates offered to borrowers.

What do the experts think? Our mortgage expert, Matt Smith, says: “Today’s decision to hold the Base Rate as expected is some further good news to those planning a New Year move and looking to take out a mortgage soon. We typically see more people consider their moving plans after Christmas, and after 20 consecutive weeks of steady average mortgage rate falls, this is the most settled mortgage market we’ve seen for a while, giving confidence to those thinking of moving. However, rates do remain at elevated levels.

“The market opinion remains that Base Rate has reached its peak. The fact that swap rates fell further after the latest UK GDP data was published yesterday, was another indicator that the markets were confident about how today’s announcement would play out.

“Many of the factors that contributed to the hold in September and November are continuing, and a flattened Base Rate, which could begin to fall in 2024, is looking increasingly likely. Today’s hold could provide some room for lenders to offer further mortgage rate drops – though it’s likely that lenders may hold back offering these to borrowers this side of Christmas, to take advantage of the seasonal jump in demand that usually happens in January,” he adds.

What does the Base Rate hold mean for my current mortgage? Changes to the Bank’s Base Rate can impact how much interest you’ll pay on loans, including mortgages. If you’re on a fixed-rate deal, your monthly payments won’t change until the end of your deal. And if you’re on a variable or tracker mortgage, this month’s Base Rate hold will mean your monthly payments remain the same.

If you’re coming to the end of your fixed-rate mortgage soon, you’ve probably already started to think about the rate you’ll be offered on your next deal. In July, the Mortgage Charter was launched to help those struggling to meet their monthly payments, as well as borrowers who are coming to an end of their fixed rates soon.

Under the Mortgage Charter, borrowers will be able to lock in a new deal up to six months before your expiring deal ends. You can also request a better like-for-like deal with your lender up to two weeks before your new term starts, if one is available.

If you want to know more about what to consider when looking for a mortgage rate, take a look at our article: choose whether a 2 or 5-year fixed could be the right option for you.

When could interest rates start to drop? The Bank of England’s Monetary Policy Committee meets about every six weeks to discuss and vote on whether interest rates should go up or down, or stay the same.

Though signs are showing that Base Rate is at its peak, it is likely to remain flat into 2024, before starting to drop back. History has shown that after interest rates have increased over time, they have remained flat before starting to come down. However, markets are currently forecasting that the first Base Rate reduction may arrive in late Spring 2024. Though this could change, depending on changes in the broader economic environment.

The next decision on interest rates will be announced at 12pm on 1 February 2024.