Why Are UK Mortgage Rates Still High? Will Mortgage Rates Go Down In 2025?

Matt | Personal Finance

Why Are UK Mortgage Rates Still High In 2025 Despite Base Rate Cuts? Will Mortgage Rates Go Down, Remain The Same Or Go Up In 2025? (We Need To Talk About SONIA!) #mortgagerates #homeownership #personalfinance   In this video, I explain why UK fixed-rate mortgages have been going up in 2025 even after the Bank of England reduced the base rate to 4.75% in November 2024 — a trend that's leaving many homeowners and first-time buyers confused. I break down key concepts like Bond Yields and SONIA Swap Rates, showing how these factors, along with economic concerns and global market shifts, are driving up borrowing costs   Whether you're a homeowner, renter, or first time buyer looking to get onto the property ladder, this video provides valuable insights and practical advice to help you navigate the current mortgage market and plan for 2025.   Don’t forget to like, comment, and subscribe to my YouTube Channel for more personal finance insights!   #mortgage #mortgagerates #homeownership #home #property #flat #firstimebuyer #movinghome #buyingahome

Transcript

00:00In November 2024, the Bank of England reduced the base interest rate to 4.75%, which was welcome news

00:07for home buyers and first-time buyers, hoping this would be a continued trend in 2025 and that

00:13mortgage costs would come down. But the confusing thing is that fixed-rate mortgages have actually

00:18gone up instead of down. Why? In this video, I'll cover the key reasons why fixed-rate mortgages

00:24in the UK are going up right now and will also cover the outlook for the rest of 2025. If you're

00:30new to this channel, I'm Matt. I've been a finance consultant for over 10 years. I now run my own

00:36company and on this channel, I talk all things personal finance. So let's start with what

00:40influences fixed-rate mortgages in the UK. There are two key concepts to understand. The first is

00:46bond yields and the second is something called Sonya swap rates. And I'm going to explain both

00:51in a bit more detail now. The UK government generally spends more than they raise in tax,

00:57so they borrow money to fill the gap, usually by selling bonds to investors. UK government bonds

01:03are normally considered very safe, with little risk that the money will not be repaid, and they're

01:08mainly bought by financial institutions such as pension funds. The percentage return, known as the

01:14yield on government bonds, has been going up since around August 2024. Bond yields reflect the cost of

01:20UK government borrowing, and these have increased recently, with the yield on a 30-year bond hitting

01:25its highest level since 1998, while a 10-year bond rose to its highest level since 2008, meaning it

01:32costs more for the government to borrow money over the long term. The rise in bond yields tends to lead

01:37to rising fixed mortgage rates, because they're very responsive to changes in interest rate expectations.

01:43Bond yields influence the mortgage market through something called Sonya swap rates.

01:47Sonya stands for the Sterling Overnight Index Average, and swap rates are the rates that the

01:52banks will lend money to each other at and reflect lenders' expectations of future interest rates.

01:58They play a critical role in how fixed rate mortgages are priced. When bond yields rise, swap rates tend

02:03to rise too, which increases the cost of funding for mortgage lenders, putting pressure on them to

02:08increase mortgage rates for home buyers who are refinancing and first-time buyers trying to get on

02:14the property ladder. As you can see from the graph, swap rates have been mostly trending upwards since

02:19mid-December 2024, which is bad news for borrowers, as fixed rate mortgages are likely to stay high,

02:25at least in the short term. So why are bond yields and swap rates rising? There are a few contributing

02:31factors to the increase. The first is that in the UK, there are concerns about the economy

02:36underperforming, as it shrunk for two months in a row, and inflation remains stubborn, with the latest

02:42data showing the inflation rate at 2.5% in December 2024, which is above the Bank of England's 2% target.

02:50The second point is that the UK government budget that was announced in October last year had a big

02:56impact too, because of the likelihood of increased government spending, which has inflationary pressures,

03:01and as a result, the Bank of England might not be able to cut the base interest rate as quickly as

03:06they hoped. And the third point is the US election and global bond yield contagion. Almost everywhere

03:12right now, government bond yields are rising. In the US, Japan and Germany, we've seen bond yields

03:18climbing too. There is a great deal of uncertainty about what will happen when the president-elect Donald

03:23Trump returns to the White House this month. He has pledged to bring in tariffs on goods entering the US

03:29and to cut taxes, and investors worry that this will lead to inflation being more persistent than

03:35previously thought. So given all of this, what happens next to UK mortgage rates in 2025? According

03:41to MoneyFacts, the average rate on a two-year fixed rate mortgage is currently 5.47%, and the average

03:48five-year fix is 5.25%. Although mortgage rates look set to remain volatile in the short term,

03:55Sarah Coles, who is the head of personal finance at Hargreaves Lansdowne, commented that despite the

04:01bond market turmoil causing knock-on effects to mortgage rates, it hasn't particularly altered

04:06the expectations of what the Bank of England is likely to do next with interest rates. She said

04:11that the market is still pricing in just over a 60% chance of a rate cut next month in February.

04:18If this happens, then it will at least mean the cost of existing variable rate mortgages will go down.

04:23Most forecasters are now predicting that UK interest rates will come down more slowly through 2025

04:29and over the next three to four years. If you're thinking about buying a home, it's generally better

04:35to consider how home ownership fits into your lifestyle and finances, rather than trying to

04:41time the market to get the best mortgage rate. With mortgage rates looking like they will remain

04:45relatively high in the short term, the decision on whether to buy or to rent, or whether to pay off

04:51your mortgage early or invest becomes increasingly important to consider. I've done videos to deep

04:57dive on these topics, so if you want to understand more, I'll leave the links to the videos down

05:02below. I hope this video has been helpful to explain and clear up some of the confusion about why fixed

05:07rate mortgages aren't falling following the Bank of England rate cuts. If there are any personal

05:13finance topics that you're interested in and would like to learn more about, then let me know in the

05:17comments below. I'd appreciate it if you subscribe to my channel and I'll see you on the next video.

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