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04 Sep

There is a strong correlation between economic health, or lack of it, and mortgage interest rates. By analysing data from the last 20+ years, we can see a direct response in the mortgage market to major events, such as the 2008 financial crisis and the current cost of living crisis in 2023. Whether the interest rates are low or high, the causation is usually influenced by major macroeconomic or geopolitical events.


source: tradingeconomics.com

Overview of mortgage trends over the last 20 Years

Statista has tracked data relating to the average mortgage interest rate since the turn of the century. The data includes average rates across a 23-year period for different fixed-term mortgages, including two-year fixed, up to ten-year fixed, as well as the average two-year variable mortgage. Looking at the chart, we can clearly see when the mortgage rates go down and when the mortgage rates are going up.

The data illustrates that across this whole period, the average mortgage interest rates were highest in the years 2000 and prior. Even though average interest rates have increased of late in response to inflation, interest rates are still lower today than they were just over twenty years ago and also lower than they were between most of 2007 and 2009. The Trading Economics chart (displayed above), on the other hand, shows that we are slightly above the highs reached before the 2008 crash.

Over the last decade, between 2012 and 2022, the average interest rate on all mortgage types had been highly stable, ranging from the lows of around 1.5% to the highest rate of around 4%.

Major economic factors affecting mortgage rates in the UK

Mortgage interest rates change based on economic factors and major events. For example, the Global Financial Crisis of 2008 caused interest rates to plummet, which is why average rates across all mortgage types sharply decreased in the immediate period after and at this stage, have never increased back to the rates seen in 2008 and some years earlier.  

In September of 2001, the average rates across all mortgage types were at record lows, ranging from 1.2% to 2.6%. However, global inflation followed due to the pandemic fallout and Russia’s invasion of Ukraine, which has since caused a significant increase in interest rates as central banks try to get the situation under control.

At the time of writing, average rates are hovering around 5% but are predicted to gradually decrease throughout 2024.

How do mortgage rate fluctuations affect the property markets?

The property market is affected by increases and decreases in mortgage interest rates. When interest rates are high, homebuyer’s borrowing power is reduced, and fewer people are encouraged to buy, with some people being priced out of the market. This means competition is reduced, and property prices, in theory, should also be reduced. This is why house prices slumped by more than 10% during the 2008 financial crisis.

Of course, when the interest rates are low, the opposite is true. The borrowing power increases along with mortgage approval rates. This increases competition in the market and can push up property sale prices.

Compare the long-term and short-term mortgage rates

Fixed-rate mortgage deals are available with different fixed-rate periods before they revert to the lender’s standard variable rate. You can find fixed deals as short as one year, whereas you can also find 5-year, 10-year, 25-year and even 40-year fixed-rate mortgages. 25-year mortgages were once the longest mortgage term you could find, but some lenders are now offering 40-year mortgages, typically with lower rates. We’ve examined this topic in more detail in our 25-year vs 40-year mortgage article.

Mortgage rate predictions and future outlook

As we are exiting a period of inflation with higher rates than previously seen for over a decade, experts now anticipate that inflation will decrease, taking interest rates with it. Central banks increase interest rates as a way to combat inflation, and because inflation has already shown signs of slowing down over recent months, the worst seems to be over. It is now expected that interest rates will also come down over the next couple of years. It will take time as these situations are known to rise like a rocket and fall like a balloon.

Conclusion

Expert mortgage advisers can use historical data to advise on where the mortgage market is heading next, which is useful when helping clients identify their most advantageous mortgage deal. Find yours by using our friendly mortgage advice service.

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