The interest rate in the UK skyrocketed last year, bringing doom and gloom for new mortgage borrowers. However, experts are anticipating a return to the pre-Covid economic landscape. Could there be light at the end of the tunnel?
A recent report from the International Monetary Fund (IMF) has suggested that record-high interest rates in the UK are likely to be temporary, with ultra-low rates set to return.
Mortgage rates reached new heights in 2022 as the Bank of England introduced several interest rate hikes in a bid to rein in inflation. Shockingly, interest rates doubled between March and December, leaving many homeowners struggling to make their payments. For the average semi-detached house in the UK, the monthly cost of a new mortgage grew by 61% over the year. Moreover, 1.4 million households are set to renew fixed-rate mortgages in 2023 and unfortunately face higher costs.
However, according to the IMF, more affordable mortgage deals could be just around the corner.
Inflation rates expected to fall
Experts predict that the inflation rate will drop back to pre-Covid levels in the coming years. According to the United Nations financial agency, an ageing population and low productivity in the UK will bring inflation back under control.
As inflation falls, changes made by the central bank will encourage the return of low-interest rates, say economists from the International Monetary Fund (IMF).
Soaring inflation, then, is thought to merely be a hiccup in the overall trend of ultra-low rates in the UK.
Recent increases in real interest rates are likely to be temporary.
IMF’s report argues that, in advanced economies, the “natural” rate of interest had not been changed by the pandemic, and that interest rates will return to their former levels once inflation has subsided.
What can we expect of future mortgage rates?
On 23 March, the Bank of England made its 11th consecutive hike, raising the base rate from 4 per cent to 4.25 per cent. But despite this, fixed mortgage rates are already showing signs of a decline.
Borrowers can find much better deals today than in Autumn last year—when the government’s mini-budget sent average rates spiralling above 6 per cent (the highest seen since 2008).
This month, the best mortgage rates on 2-, 3- and 5-year fixes are lower than those of last month and below the Bank of England base rate. This is a positive development for buyers and owners in the market for a new mortgage deal.
Whilst rates do remain high, experts are feeling positive about the UK’s financial future. If the IMF is right, and interest rates fall to pre-pandemic lows in line with inflation, homeowners, prospective buyers and investors can look forward to much more attractive mortgage deals.
It is hoped that lower mortgage rates in the coming years will continue to help buoy the demand for UK homes and stimulate house price growth across the country.
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