Mortgage rates are expected to remain steady throughout 2025, with most experts predicting that rates will stay within the 4 to 5 per cent range. Following the Bank of England’s decision in May 2025 to reduce the base rate from 4.5 to 4.25 per cent, many households welcomed the news, although the overall impact on fixed mortgage deals has been relatively modest. The average rate for a two-year variable mortgage with a 75% loan-to-value currently stands at 4.75%, while the average five-year fixed rate is around 5.04%. These figures have declined notably from their peak in mid-2023, when a comparable five-year fixed rate stood at 5.8%, adding significant pressure to monthly budgets for both new buyers and existing homeowners.

Among the major lenders, the average rate for a two-year fixed mortgage is lower at 4.27%, while the five-year fixed deal is even more competitive at 4.19%. Standard variable rates remain considerably higher, with the average market rate at 7.74% and the leading lenders offering slightly better terms around 6.75%.

Despite this downward trend, it’s unlikely that mortgage rates will fall below 4% this year. Financial analysts suggest that any further reductions will be modest. If the base rate does decline to 3.5% by the end of 2025, as some predict, mortgage rates are still expected to remain slightly above 4%. Richard Donnell, Executive Director of Research at Zoopla, points out that expectations of lower interest rates are already factored into today’s fixed-rate mortgage pricing. Even if the base rate is lowered further, mortgage rates may only see small additional drops.

The decline in mortgage rates is closely linked to wider economic conditions. Inflation, which peaked at 6.3% in September 2023, dropped to 4.2% by the end of that year. It hit the Bank of England’s 2% target in June 2024 but has since risen slightly to 2.6%. In response, the Bank has made three cuts to the base rate since August 2024, most recently in May 2025. These decisions reflect a careful balancing act—easing borrowing costs to support economic growth while keeping inflation in check.

Interest rates in the UK are largely driven by inflation. When demand exceeds supply or global events disrupt trade and push up prices, inflation tends to rise. To manage this, the Bank of England began raising interest rates at the end of 2021 to help curb price increases for essentials like food, petrol, gas and electricity. Although inflation is now closer to target levels, the Bank must keep interest rates high enough to prevent a resurgence.

A positive development for potential homebuyers is the anticipated relaxation of mortgage affordability tests. Lenders don’t just assess the rate the buyer will pay, they also apply a ‘stress test’ to ensure the borrower could afford higher repayments should rates increase. Currently, although many mortgages are offered at rates around 4.5%, lenders often assess affordability as if the buyer were paying 8 or 9%. This makes securing a mortgage difficult without a substantial deposit. If stress tests return to pre-2022 levels of around 6.5 to 7%, buyer affordability could rise by 15 to 20%.

For example, a first-time buyer with monthly repayments of £1,020 at a 4.5% mortgage rate would currently need to prove they could manage payments of £1,550 if rates rose to 8.5%. If the stress rate were eased to 6.5%, the affordability benchmark would drop to £1,275, significantly improving their borrowing potential. The same principle applies to current homeowners, although the exact effect will vary depending on the lender and the borrower’s profile. This easing could help boost demand and transaction volumes in the housing market, although other regulations affecting mortgage availability will remain in place.

Market conditions are also improving for buyers due to an increase in housing supply. There are now 12% more homes for sale compared to a year ago, as more sellers re-enter the market many of whom are also prospective buyers. This increase in supply gives buyers more choice and greater leverage to negotiate on price. According to Donnell, a higher availability of homes helps keep prices stable and gives buyers more room to manoeuvre, particularly when a property is struggling to attract interest.

In summary, while mortgage rates are unlikely to drop below 4 per cent in 2025, they are expected to remain more stable and affordable than they have been in recent years. With relaxed affordability criteria on the horizon, more homes on the market, and growing interest in affordable regions, the outlook for buyers is looking more positive as the year progresses.

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