Are we waving goodbye to ultra-low mortgage rates forever? The Bank has hinted at potential rate cuts, but don't hold your breath for a return to the jaw-dropping deals of the Covid era. Here’s why: the current rates are teetering on what economists call the 'neutral level'—not high enough to cool inflation, but not low enough to spark it either. And this is the part most people miss: if inflation is inching toward that just right Goldilocks state, the Bank won’t risk derailing it by slashing rates too aggressively or too soon. But here's where it gets controversial: while some economists predict one to three more rate cuts this year, others whisper that the Bank might start raising rates again by 2027. Yes, you read that right.
If this plays out, the base rate could bottom out at 3-3.5%, a far cry from the rock-bottom levels seen during the pandemic. Why the shift? Two key reasons. First, the early 2020s saw rates plunge to historic lows as the economy was propped up during the unprecedented lockdown shock. But that crisis is now in the rearview mirror. Second, the inflation spike triggered by the Ukraine war sent food and energy costs soaring, creating a stubborn cost-of-living crisis. Those eye-popping price tags on everyday essentials? They’re not just hitting our wallets—they’re shaping our inflation expectations and, in turn, our behavior, like demanding higher wages, which could fuel future inflation. Bold prediction: this psychological scarring isn’t going away anytime soon, and it’s keeping rate-setters up at night.
So, where does this leave savers and borrowers? Savers might dodge the bullet of seeing their returns shrink to near-zero—though banks often cut savings rates without much provocation. For borrowers, though, the outlook is less rosy. Take someone whose five-year fixed-rate mortgage is ending this year, locked in at pandemic-era lows. Remortgaging now? They’re likely staring down a higher rate. The Bank estimates that nearly four million residential borrowers—two out of five—will face a similar hike in the next few years, with repayment costs jumping by an average of 8%. (Though, in fairness, one in three could see lower repayments during this period.)
While more rate cuts might be on the horizon, a return to dirt-cheap mortgages feels like a distant memory. Here’s the thought-provoking question: Are we entering a new normal where ultra-low rates are a thing of the past, or is this just a temporary blip? Let us know what you think in the comments—we’d love to hear your take!
