Homeowners are being told to brace for continued high mortgage rates next year – with the Bank of England set to raise interest rates.
The ongoing conflict in the Middle East has driven the cost of oil up, which has fed through into a higher rate of inflation – the rate at which prices rise.
Economists expect inflation to continue rising and peak at above 4 per cent, which is likely to push the Bank of England to increase interest rates.
Most economists expect the Bank to hike rates twice in the next few months, while financial markets are forecasting even more rises – as many as four in the next year.
Fixed mortgage rates, which most customers have, are linked to swap rates – contracts between banks – and these rates tend to follow long-term market forecasts for where the Bank of England base rate could go next.
Why are rate rises expected
The conflict in Iran, which broke out earlier this year, has caused a global shortage of oil, leading to a jump in prices as food and manufacturing costs increase.
This inflation spike has provoked an increase in swap rates. They are hovering between 4.65 per cent and 4.75 per cent, which means banks are pricing their mortgages above this, to make some profit.
Mortgage prices are at their highest level since 2023, with the average two-year fixed mortgage today sitting at 5.96 per cent and the average five-year fixed rate reaching 5.99 per cent – though cheaper deals are available.
Ruth Gregory, deputy chief UK economist at Capital Economics, and Thomas Pugh, chief economist at RSM UK, said they both think the base rate will rise to 4 per cent in November and then to 4.25 per cent in February.
Crucially, a quick drop to the base rate isn’t expected either, with Gregory not expecting a first cut until the end of next year, with rates only going below their current level of 3.75 per cent in 2028.
Elevated rates in 2027
Although experts have said the outlook for mortgage rates remains uncertain for next year, experts expect them to remain elevated.
Just how elevated will depend on whether inflation and the BoE’s base rate go higher or lower than markets currently expect.
Alper Kara, professor of banking and finance at Brunel University, said he expected rates to stay at their current levels next year.
He said: “Average two- and five-year fixed rates are currently around 6 per cent. I expect that mortgage rates will remain around these levels into 2027, with some borrowers paying more.”
Nick Mendes, mortgage technical manager at John Charcol brokers, added: “Mortgage rates are likely to stay around today’s levels in 2027, although the risk is that they edge higher rather than lower.
He added: “For many households, the biggest change in 2027 will come from the deal they are leaving rather than the one they are moving to. Someone who fixed for five years in late 2021 or early 2022 at around 1.5 per cent would see monthly payments on a £150,000 mortgage over 25 years rise from around £600 to around £870 at today’s best five-year rates.”
Caitlyn Eastell, personal finance analysis at financial information website Moneyfacts, said the prospect of interest rate rises in 2027 would be “a blow” to mortgage borrowers that were hoping for some respite after grappling with higher living costs.
There is also bad news for another type of mortgage holder – those who have tracker and variable mortgages.
These feature an interest rate that is usually linked to the BoE’s base rate – meaning if the base rate rises the amount people pay on their mortgage will also rise immediately, rather than when their deal expires.
David Hollingworth, associate director of communications at L&C Mortgages, added: “Those considering a variable rate will need to be sure that they have enough flex in their budget to cope with climbing payments.”
Is there any hope?
Although, rates may remain elevated at the start of 2027, some experts say we can’t rule out reductions.
Peter Stimpson, director of mortgages at lender MPowered, was hopeful the Bank of England may start to cut interest rates in the Spring of 2027 in response to easing inflation, which would likely see mortgage rates fall a little, because this was a better scenario than markets are currently forecasting.
He said: “For customers who have seen fixed-rate mortgages rise by over 1 percentage points since April, the reverse pattern is very possible.”
The drivers of mortgage rates in the new year will largely be centred around what happens in the Middle East and the knock-on effects to energy prices, inflation and government borrowing costs.
A ceasefire in the Middle East could change the game entirely.
What to do if your deal is ending
Those coming off mortgage deals in the next few months may face elevated prices.
Kara said: “Someone coming off a particularly cheap five-year fix could face a sizeable increase in repayments. Others whose existing deal is already relatively expensive may experience less change.”
Brokers have said it is important for mortgage borrowers to be prepared and plan ahead to navigate the uncertainty of 2027.
Many banks allow you to lock in a new mortgage rate up to six months before yours ends.
That way if rates rise in the meantime, you will have the cheaper deal locked in, but if they drop, you can then switch to the cheaper deal.