Assessing UK Mortgage Rates: Is Downsizing or Renting a Viable Option

Prateek Solapurker
September 29, 2023
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Understanding UK Mortgage Rates

UK mortgage rates, either fixed or variable, play a significant role in the housing market. The fixed rate mortgage offers a sense of security with steady repayments, though they are generally higher than variable rates due to this stability. Variable rates, on the other hand, adjust according to the Bank of England's base rate. Another crucial factor is that even “fixed” rate mortgages are fixed typically for only two or five years and are variable during the remaining term of the mortgage, which is typically 30years.

Why are UK Mortgage Rates Significantly Higher Recently?

There are several reasons why UK mortgage rates have gone through the roof. The first is the high UK inflation rate, which led to Bank of England rate hikes as discussed in the next section. Also, while the base rate is critical, mortgage rates typically tend to reflect market expectation of what lies ahead. In other words, given the current economic circumstances, mortgage rates are dependent on  the market consensus  on  rates evolution over the next two to five years.

Impact of Bank of England's Base Rate Change

The Bank of England's base rate is a vital determinant of UK mortgage rates. A change in the base rate impacts the cost of borrowing, with an increase typically leading to a rise in both fixed and variable mortgage rates. Conversely, a reduction in the base rate often results in lower mortgage rates. However, the impact of base rate changes on mortgage rates is not always immediate and can sometimes lead to even higher mortgage rates in the expectation that the Bank of England will keep raising the base rate. Over time though, changes in the base rate tend to filter through to mortgage rates.

Assessing Mortgage Options: Downsizing vs Renting

In the current economic climate, with the Bank of England adjusting interest rates and the ongoing cost of living crisis, assessing mortgage options has become a pressing issue for many UK residents. The decision between downsizing or renting is a significant one, requiring a thorough understanding of the UK inflation rate and its impact on fixed rate mortgages, rental payments and UK house prices today.

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