Inflation has continued to spike in the past decade, but in May 2024, the Bank of England achieved their goal of reducing it to 2%. These new levels will have implications for interest rates, which affect everything from your savings to your everyday costs, and of course, your mortgage.
This article will explore the changes that might happen to interest rates and inflation in the next five years, and how these will affect your mortgage decisions. Let’s start by exploring interest rate trends and why they have increased.
Why have interest rates increased?
COVID and the subsequent lockdowns led to an increase in living costs worldwide. Supply chains were also disrupted by Russia’s invasion of Ukraine, and energy and fuel prices increased as a result.
All of this uncertainty led to inflation reaching just over 11% in October 2022, the highest in 41 years. Interest rates were raised to 5.25% to combat the situation, but now inflation has settled at 2%.
With such a dramatic inflation decrease, there were calls for interest rates to come down, too, but the MPC (Monetary Policy Committee) voted to keep them unchanged for the time being.
What will happen to interest rates?
Interest rates have risen 14 times since December 2001, but in 2024, they look set to be cut at least once. However, while they will reduce, they won’t go as low as they were before 2008.
The International Monetary Fund has recommended that the Bank of England make seven interest rate cuts in 2024 and 2025, which could bring them down to 4.5% by the end of 2024.
In response, the British Chambers of Commerce have predicted that rates will fall to around 4.35% by the end of 2025 and 3.95% by the end of 2026.
What do interest rates mean for your mortgage?
While high interest rates have led to high returns on savings accounts, mortgage rates have also increased from an average of 2.34% in December 2021 to 5.8% in May 2024. Because of this, people who’ve taken out a new mortgage in the past couple of years have paid more than they would have in the years preceding 2022, which has caused lots of issues, particularly relating to mental health.
Unfortunately, mortgage rates will stay high in 2024, which is bad news for people on variable mortgage deals in particular. This applies to lots of people in the UK who have been waiting (and hoping) for a drop before committing to a fixed-rate mortgage.
Predicting interest rates over five years is difficult given the unpredictability of politics and the global economy, but most experts agree that rates could be around the 3% mark by 2029, with incremental reductions taking place throughout this period.
Conclusion
Inflation is finally heading in the right direction in 2024 and the next five years look set to be much steadier than the previous. However, interest rates are slow to drop due to the volatility of global politics, so it pays to have a mortgage adviser help you navigate these difficult times.
At Cedar House Financial, we have years of experience in the mortgage industry and a track record of helping clients find the right deal. Contact us to get the ball rolling on your mortgage journey with an option that suits you and your family.