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

Will the mortgage rates in 2025 see an increase or offer relief to prospective and current homeowners?