In times of economic uncertainty, fixed-rate mortgages have proven popular with borrowers seeking guaranteed payments.
This has been particularly true over the past few years, where rising interest rates, high inflation, and economic and political uncertainty have continued to dominate the headlines.
While 2024 could be seen as an improvement on the year before, it still presented a number of peaks and troughs for the UK mortgage market.
According to the Bank of England’s data on quoted household interest rates, fixed-rate mortgages plateaued, with the average interest rates for 2-year and 5-year fixed products remaining relatively stable throughout the year.
However, persistent inflationary pressures and rising costs meant that affordability constraints remained a significant challenge for many borrowers.
The Bank of England’s December 2024 Monetary Policy Summary further noted that the average rate paid on outstanding mortgages increased as many fixed-term borrowers refinanced onto higher rates.
This was compounded by the calling of a snap General Election in July and the subsequent change of government, which saw borrowers retreat somewhat as they adopted a wait-and-see approach regarding the impact of Rachel Reeves’ budget on the UK economy.
Base rate cuts and cautious optimism
As we head into a new year, there is, however, some scope for cautious optimism.
The Bank of England’s decision to cut the base rate in August and November 2024 is a positive sign that inflation is heading in the right direction, which should begin to ease some of the affordability challenges faced by borrowers.
Speculation that interest rates will continue to fall in 2025 has also been forecast by many industry experts – a view reaffirmed when the Governor of the Bank of England, Andrew Bailey, spoke about the possibility of up to four base rate cuts this year.
Although Bailey refused to be drawn on specific future projections, he confirmed that a number of rate cuts were likely in 2025 if the economy continued to align with the central bank’s forecast. This is welcome news for borrowers and brokers alike and should help stimulate further growth and competition in the market.
The case for variable rates
While affordability will continue to remain a critical factor influencing mortgage decisions in 2025, the prospect of further base rate reductions could provide more confidence to borrowers seeking greater flexibility in their mortgage choices.
Recent figures from Zoopla indicate that house price growth is likely to be modest, at just 2.5% over the course of the year.
A combination of base rate reductions and more stable house prices could lead to an increase in the number of borrowers considering variable rate mortgages.
Although a base rate cut does not automatically result in a reduction in a lender’s Standard Variable Rate (SVR), the expectation of a less aggressive or even declining interest rate environment could increase the appeal of variable rate products.
This is particularly true for borrowers with stable incomes and healthy equity or savings, who may be looking for greater flexibility in their mortgage options.
The year ahead
With competition among lenders likely to remain fierce, the appeal of variable rate products—through attractive rates and terms—could be one to watch.
Additionally, the possibility of a declining interest rate environment in 2025 means more borrowers may seek to capitalise on the potentially lower costs that a variable rate mortgage could offer.
For advisers working in the mortgage market, this presents an opportunity to offer an alternative to fixed-rate products, outlining the nuances of variable rate mortgages and the benefits they can provide to certain borrowers.
While there will always be situations where a variable rate mortgage may not be the most suitable option for a client, 2025 could prove to be a year when variable rates become a compelling solution for those seeking potential short-term savings.
Tom Denman-Molloy is intermediary sales manager at Mansfield Building Society
