What will happen to interest rates in 2024?

As festive downtime allows usually-busy professionals to reflect on 2023, many will be now be looking ahead to 2024 plans. The question on the minds of many homeowners and potential homebuyers is: what will happen to the cost of mortgages? 

House prices continued to rise in many locations, although at a slower pace than in previous years, and the signs for 2024 indicate that overall house price growth will accelerate again, driven by high demand and low supply. 

Professionals with variable incomes, especially those with existing mortgage commitments, will want to understand the potential impact on their largest household cost. The question is, how do you forecast interest rates without a crystal ball or a first-class degree in economics?

Predicting interest rates is no easy task, as they are influenced by a multitude of factors. The Bank of England plays a significant role in setting these rates, taking into account economic trends, inflation levels, Government priorities, and demand for lending. And that’s just the factors we know about.
However, one factor that can provide some insight into future interest rate movements is swap rates. For those looking to impress family and friends over the festive break, here is what they are and why they are important.

An interest rate ‘swap’ is the rate paid by the receiver in exchange for swapping their floating (i.e. variable) rate for a fixed one for a specified period of time. It reflects the risk of guaranteeing a fixed rate. Importantly, swap rates reflect market expectations for future interest rates and can give us an indication of how mortgage costs may be affected. 
If swap rates increase, it could signal higher borrowing costs for lenders which may be passed on to homeowners through increased mortgage rates. Conversely, if swap rates decrease or remain stable, it could potentially lead to more affordable monthly mortgage payments.

Another important consideration that is interlinked with swap rates as a driving factor for what we pay is inflation. It has rarely been off UK news channels throughout 2023 as the increased cost of living has seen sharp increases in mortgage rates. Rising inflation has put pressure on the Bank of England to increase interest rates as a means of controlling price growth. This could impact the cost of borrowing for mortgages in 2024 if inflationary pressures persist. Thankfully, inflation saw a sharp drop in the last quarter of 2024. 

As mentioned earlier, demand in the housing market also plays a vital role in shaping interest rate trends. If demand remains high due to factors such as government incentives or an influx of first-time buyers entering the market, it could drive up house prices and subsequently impact mortgage affordability.

Ultimately, while we cannot predict with certainty what 2024 will hold for UK interest rates and mortgage costs, understanding these key factors can help homeowners and prospective buyers make informed decisions about their financial futures. Keeping an eye on trends in swap rates, inflation levels, demand dynamics, and government policies will be crucial when navigating the ever-changing landscape of the housing market. Shaping your own opinion based on these factors, alongside professional advice, will provide an important barometer before acting on mortgage decisions. 

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