The “new normal” for mortgage rates begins in 2023

If the dominant theme of 2022 was how quickly interest rates rose, the big theme of 2023 will be when and how high they peak.

The Monetary Policy Committee is likely to vote for another increase in the base rate at February’s meeting, at which point economists believe we will be close to the end of this series of interest rate hikes.

A large majority of economists polled by Reuters believe the base rate will peak at 4.25% during the spring, up from 3.5% today. How long interest rates remain at that level remains a point of contention – consultancy Oxford Economics, for example, sees a return to marginal falls in interest rates starting in Q1 2024.

We expect mortgage rates to remain relatively stable under these conditions. The volatility of the past two years was highly unusual, and we have likely entered a period of higher interest rates that will endure for the foreseeable future. A November forecast from the Office for Budget Responsibility suggested that the average mortgage rate paid by homeowners could remain at 4.6% as far out as 2027.

Where are mortgage rates now?

Swap rates eased and fixed mortgage rates fell in December as the chaos of the mini-budget subsided. By the end of the month, the best five-year fixed rates products stood around 4.6%, while the best trackers were available at 4%.

We may see some more marginal cuts to fixed mortgage rates during January and February – perhaps even seeing some deals beginning with a three. That’s despite the Bank of England’s ongoing efforts to bring inflation back to the 2% target.

Source: The Bank of England

That will act as a drag on activity through 2023 and 2024 as borrowers rolling off cheaper deals adjust to the new environment. Moderate house price growth returns from 2025 onwards, according to both Knight Frank and the OBR forecasts.

In the short term, tracker rates have been rising in line with the base rate and the gap with fixed rate products has been narrowing. It could be as soon as late January or early February that the two converge or come close.

That will pose a tricky decision for borrowers. Some may opt to wait on trackers, betting that fixed rates will fall further, while others will opt to lock in a fixed rate product to get better visibility on their outgoings during what will be a difficult period from an economic perspective.