Despite falling mortgage rates, it’s likely that homeowners coming off longer-term fixed rates will face higher monthly mortgage repayments until the second half of 2027.
Based on future interest rate expectations, borrowers whose five-year fixed-rate mortgage deals expire between 2024 and 2027 will still face significantly higher monthly payments upon remortgaging. While falling mortgage rates mean the uplift is smaller than it had been, anyone coming off a five-year fix today is still likely to face an increase of between 20% and 24%.
But this percentage is projected to rise, peaking at around 26% for many remortgaging in September 2026 as those who were able to take advantage in 2021 of the cheapest mortgage deals for a generation next need to refinance.
Our analysis indicates that it will take until September 2027 for the first cohort of long-term borrowers to see their monthly mortgage payments start to fall. These borrowers took out five year fixed rate mortgages just as rates started to rise rapidly in late 2022. Consequently, they will be the first group who fixed for five years to see their monthly mortgage repayments start to fall.
As mortgage rates rose, stress testing and the lower rates on offer encouraged many borrowers to fix for longer. In late 2022 and mid-2023 the share of borrowers fixing for five years rose sharply, because affordability tests tend to be softer for those borrowing for longer. Markets also expected rates to drop over the period so the rates on longer mortgages tended to be lower than on shorter mortgages.
But like all forecasts, this analysis comes with plenty of caveats. It is based on what are fairly long-term current market expectations, which are of course subject to change. Should inflation fall faster or further than the Bank of England expects, it’s likely that base rate expectations will drop, pulling down mortgage rates with them. Of course the reverse could also be true.
With five-year fixed rate mortgages accounting for around half of lending, it means that borrowers are exposed to higher rates later and perhaps for longer than the Bank of England believes interest rates should remain elevated. While some lucky (or clever) borrowers may well mostly avoid paying higher mortgage rates altogether.
This analysis shows most longer-term borrowers will see mortgage payments continue to rise until at least late 2027. This means until then borrowers are likely to continue reducing their spending elsewhere to absorb higher housing costs. This will probably be well beyond the point that the Bank of England looks to bear down on inflation with higher interest rates. This could serve to restrict economic growth even as the Bank of England cuts rates to stimulate demand.
