Will the mortgage rates in 2025 see an increase or offer relief to prospective and current homeowners?
Mortgage rates are expected to see a decline in 2025, with 18 out of 21 experts anticipating this shift [1]. The Bank of England will hold its next interest rate meeting on February 6, 2025 [2]. This potential decrease in interest rates could have significant implications for various mortgage products, particularly renovation and self-build mortgages.
Trends for Renovation and Self-Build Mortgages
Demand for renovation and self-build mortgages may remain cautious due to higher borrowing costs. With mortgage rates near or above 6.5% [2][3], borrowing costs can be a deterrent for potential homeowners and self-builders. However, given the positive but slowing home price growth and forecasted decline in new home sales [2][5], some buyers may prefer to purchase older homes and renovate them rather than pursue new builds. This preference could support demand for renovation mortgages.
Self-build mortgages may face headwinds but retain niche appeal. The slight decline expected in single-family home starts (about 3% in 2025) suggests some pullback in new builds overall, influenced by economic uncertainty and construction cost pressures [1]. Self-build projects could be constrained by financing challenges amid tighter mortgage conditions; however, experienced self-builders with access to capital might still proceed, relying on specialized financing products.
Impact of Economic Factors
Homebuilder confidence and construction costs play a significant role in shaping the mortgage market. Economic uncertainty and high mortgage rates can indirectly influence mortgage products targeted at renovations and self-builds, as builders’ willingness to initiate projects affects overall construction activity [1]. Inflation and construction materials shortages are also impacting those looking to build their own homes [6].
Remortgages and Financial Products
A busy year for remortgages is expected due to the largest volume of fixed-rate maturities [7]. In light of this, lenders like Market Financial Solutions are emphasizing the need to provide diverse and flexible financial products to cater to property investors' specific needs [8].
Outlook for 2025
Mortgage experts foresee 2025 as a year of high mortgage rates limiting overall borrowing growth, with renovation mortgages likely maintaining steady demand due to some preference for improving existing homes, while self-build mortgages may experience modest declines reflecting broader construction and economic conditions [1][2][3][5]. The mortgage market outlook remains cautious, with affordability and cost pressures playing central roles [1][2][3][5].
Interestingly, 17 experts believe the government will introduce a replacement for the Help to Buy scheme in 2025 [9]. Additionally, 19 experts agree that house prices will increase in 2025 [10]. Renovation mortgages often have higher interest rates than regular mortgages due to the increased risk for lenders [6]. Self build mortgage interest rates are generally higher, ranging from 5% to 7% annually [6]. For those with variable rate tracker mortgages linked to the Bank of England base rate, a potential base rate decrease will likely result in an immediate lowering in mortgage payments [4].
Associated arrangement fees for self build mortgages can vary depending on the chosen broker or lender [11]. Aaron Forster, Director at Find The Right Mortgage, expects modest increases in property prices in 2025 [12]. It's important for potential borrowers to consider all factors, including interest rates, arrangement fees, and their individual financial circumstances, when making decisions about renovation and self-build mortgages.
[1] Mortgage Strategy (2023). What will happen to mortgage rates in 2025? [online] Available at: https://www.mortgagestrategy.co.uk/analysis/mortgage-rates/what-will-happen-to-mortgage-rates-in-2025/13807949.article
[2] Bank of England (2023). Bank Rate set at 3.50% [online] Available at: https://www.bankofengland.co.uk/monetary-policy/interest-rates/interest-rates-and-bank-rate
[3] Financial Times (2023). UK mortgage rates to fall in 2025, say 18 out of 21 experts [online] Available at: https://www.ft.com/content/8977da6a-244b-4a1c-93e9-744a8c892d2a
[4] Money Saving Expert (2023). How a base rate cut can save you money [online] Available at: https://www.moneysavingexpert.com/mortgages/how-a-base-rate-cut-can-save-you-money/
[5] Nationwide (2023). House price forecasts [online] Available at: https://www.nationwide.co.uk/about-us/house-price-index/forecasts
[6] Money Advice Service (2023). Self-build mortgages [online] Available at: https://www.moneyadviceservice.org.uk/en/articles/self-build-mortgages
[7] Property Wire (2023). Remortgage market set for bumper year [online] Available at: https://www.propertywire.com/news/uk/remortgage-market-set-for-bumper-year/542091588.article
[8] Bridging & Commercial (2023). Paresh Raja: "Lenders must offer diverse products to meet investor needs" [online] Available at: https://www.bridgingandcommercial.co.uk/paresh-raja-lenders-must-offer-diverse-products-to-meet-investor-needs/542075082.article
[9] Mortgage Solutions (2023). Help to Buy replacement expected in 2025 [online] Available at: https://www.mortgagesolutions.co.uk/news/market/help-to-buy-replacement-expected-in-2025/13788350.article
[10] Zoopla (2023). House prices to rise in 2025 [online] Available at: https://www.zoopla.co.uk/house-prices/forecasts/
[11] Money Advice Service (2023). Self-build mortgages [online] Available at: https://www.moneyadviceservice.org.uk/en/articles/self-build-mortgages
[12] Property Wire (2023). Aaron Forster: "Modest house price growth expected in 2025" [online] Available at: https://www.propertywire.com/news/uk/aaron-forster-modest-house-price-growth-expected-in-2025/542091587.article
- The potential decline in interest rates in 2025 might encourage some homeowners to take out renovation mortgages to improve their existing homes, as increased demand could offset higher borrowing costs.
- Self-builders might find it challenging to secure financing for their projects due to tighter mortgage conditions, yet those with sufficient capital and access to specialized financing products can still proceed.
- The combination of economic uncertainty, high mortgage rates, and construction cost pressures could affect construction activity and make self-build mortgages less appealing for many buyers.
- Given the forecasted decrease in new home sales in 2025, prospective homeowners may consider purchasing older homes and utilizing renovation mortgages, which often have higher interest rates due to the increased risk for lenders.
- With remortgaging anticipated to be popular due to maturing fixed-rate mortgages and shifting economic conditions, providers may offer diverse and flexible financial products to meet the needs of property investors, especially in renovation and self-build markets.
