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When will interest rates fall? And what does this mean for mortgage deals?

Row of Typical English Terraced Houses at London.
For anyone with a variable rate mortgage the pain of rising mortgage rates may not be quite over. Photo: Getty (fazon1 via Getty Images)

Right now, interest rates seem to be on the slow climb of a rollercoaster, ticking up gradually to the kind of alarming heights we haven’t seen for years.

What anyone with a mortgage wants to know at this stage, is just how much further it’s going to go, when it’s going to fall, and at that stage, whether it will be a precipitous drop — or something far more disappointingly pedestrian.

When will interest rates fall?

It looks like the ascent hasn’t finished just yet, because the market is still pricing in one more small rise — to 4.75%.

Some commentators think there might even be two in the pipeline. At that point, just as with any decent rollercoaster, we’re likely to get an impressively long pause before anything else happens.

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Exactly how long rates remain suspended in mid-air will owe a great deal to what happens to inflation. This is expected to drop as we go through the rest of the year, eventually opening the door to rate cuts.

Read more: Supermarket swaps to cut your own personal rate of inflation

However, if we get any surprise rises, or if the drops take forever, it could delay things. It also owes something to the state of the economy. If it holds up and clings onto growth it could mean cuts are postponed, whereas if it starts to struggle, the pressure will be on for swift action.

At the moment, there’s a broad consensus that rates will start to fall in 2024, and people are largely expecting it to happen in the first half of the year.

However, opinions vary as to whether this will happen at the start of the year, in the spring, or even further down the line.

When those cuts eventually come, they’re not going to bring us the exhilarating plunge of a rollercoaster. In fact, the descent is likely to be even slower than the ascent was. Some are predicting it could take until the end of 2024 for rates to fall back to 3%.

What does it mean for mortgages?

For anyone with a variable rate mortgage — like a tracker deal or the SVR — it means the pain of rising mortgage rates may not be quite over, and the relief when they start falling again could be a year down the line.

Anyone with a fixed rate mortgage is protected for the length of their deal, but if yours is coming to an end, the question is where those fixed rates will go next.

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Right now, Moneyfacts says the average two-year fix is around 5.3% and the average five-year deal is 5%. This is unlikely to rise much if we get a bump in rates in June, because banks are less worried about interest rates right now than they are about what they expect them to be during the whole of the fixed period.

Right now, the market is pricing in one or two small bumps, and then a series of rate cuts in 2024 and beyond.

Economically, things look like they may be dicier the further ahead you look, so it’s expecting more Bank of England rate cuts later. It means that not only are five-year mortgages cheaper than two-year ones, but as long as the outlook remains the same, then the closer we get to the first of the Bank of England rate cuts, the more we’re expecting mortgage rates to drift gradually lower.

However, it’s worth bearing in mind that you could wait an age for any serious movement — and there’s always the chance of a nasty surprise.

Read more: Forget about getting rich quick, getting rich slowly is better

For those on variable deals, who are wondering whether to fix, this makes life even more difficult. Holding on has been increasingly expensive, and fixed rates have hardly been plummeting in the interim.

Some people have room in their budget and a willingness to take a risk, so will be happy facing the possibility of one more rise in the hope of falls further down the line. For others, the slow pace of mortgage rate falls will be enough to tip the balance, so they may well give up waiting and take the plunge.

Watch: Bank governor signals further rate hikes if inflation ‘persistent’

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