UK mortgage rates fall for first time since 2021

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UK average mortgage rates fell for the first time in over two years, according to data from the Bank of England, suggesting that the burden on homeowners is easing as lower borrowing costs filter through.

The data, released on Tuesday, adds to signs of stabilisation in the property market as mortgage approvals rose for the third consecutive time to a six-month high in December.

The BoE data also showed the “effective” interest rate — the actual interest paid — on newly drawn mortgages fell by 6 basis points to 5.28 per cent in December, marking the first drop since November 2021.

“There are green shoots of a recovery in the housing market and perhaps the wider economy,” said Ashley Webb, economist at the consultancy Capital Economics. 

Net mortgage approvals for house purchases rose from 49,300 in November to 50,500 last month — the highest reading since June.

Meanwhile, net approvals for remortgaging also increased from 25,700 in November to 30,800 in December, in a further sign that activity is returning to the property market.

Mortgage approvals offer an early indication of the health of the housing market. The latest figures will be closely monitored by policymakers ahead of the upcoming BoE Monetary Policy Meeting on Thursday.

Rates on popular fixed mortgage deals have started to ease from the summer, following expectations that the central bank will cut interest rates later this year. Markets expect that the BoE will hold the benchmark rate at 5.25 per cent on Thursday, but will start cutting rates in June. 

The two-year fixed mortgage rates with 60 per cent loan-to-value eased to 4.9 per cent in December from 5.1 per cent in November, well below the peak of 6.2 per cent in July. Rates on popular five-year deals have also declined since the summer, the BoE data showed. 

The data follows other indicators of an improving outlook for the UK property market. House prices rose at the end of last year, according to the mortgage providers Halifax and Nationwide. Meanwhile, separate data from the Royal Institution of Chartered Surveyors showed that surveyors had become more upbeat. 

While mortgage approvals remained below the pre-pandemic norm of 66,000 a month, “a further fall in mortgage rates in January means they will continue to recover,” according to Webb. 

The BoE also reported that net borrowing of consumer credit by individuals fell in the same period, from £2.1bn in November to £1.2bn in December.

Economists have differing views on what is driving the credit trend. For Tomasz Wieladek, chief European economist at T Rowe Price, this reflects rising real wages “as higher household disposable income means consumers need to rely less on credit for their consumption”.

However, Thomas Pugh, economist at audit and tax consulting firm RSM UK, said the significant drop in consumer credit was in line with the fall in retail sales reported by the ONS earlier in the month, adding to evidence that the economy “slipped into recession at the end of the year”.