Scottish Housing Market Review Q4 2024

6. Mortgage Interest Rates

After a tightening cycle which took Bank Rate from 0.1% prior to the December 2021 Monetary Policy Committee (MPC) meeting to 5.25% following the August 2023 MPC meeting, its highest level since 2008, the MPC held Bank Rate steady for the following 12 months before cutting it to 5% in August 2024. The Bank Rate was cut by a further 25 basis points to 4.75% on 7 November 2024, but was left unchanged at the latest MPC meeting on 18 December 2024.

Chart 6.1 and Chart 6.2 shows the effective (or average) interest rates on outstanding mortgage balances and new mortgage advances between November 2006 and November 2024. The charts show how interest rates changed in response to the cut in Bank Rate at the start of November (Source: Bank of England).

Over recent months there has been a fall in the average interest rate for new mortgage advances, from 4.86% on 31 August to 4.52% on 30 November. While average rates fell for both fixed-rate and floating-rate mortgages over this period, the average rate fell more sharply for fixed-rate mortgages (4.76% to 4.43%) than for floating-rate mortgages (5.84% to 5.62%).

While the average rate on outstanding variable-rate mortgages has edged down in recent months, reflecting the cuts in Bank Rate, the average rate on outstanding fixed-rate mortgages continues to trend up gradually as mortgages reach their end of term. This is due to the most common fixes being two and five years. Some five-year mortgages may be reaching their end of term for the first time since the upward cycle in Bank Rate began in December 2021. Meanwhile, some two-year mortgages might have been refinanced at a higher rate for the second time, since when they were previously refinanced in 2022 rates had not yet reached their current levels.

As the vast majority of borrowers are on fixed-rate mortgages (see Chart 6.4), the average rate on all outstanding mortgages at the end of November 2024 (3.81%) was only a little higher than the average rate on fixed-rate outstanding mortgages (3.48%). A similar pattern applies to new mortgages, as the figures set out earlier show.

Effective monthly interest rates on mortgage lending to households: UK (Data as at month-end, to November 2024)

Source: Bank of England

Bank of England data on advertised mortgage rates (as opposed to data in Chart 6.1 which is based on interest actually paid), also shows that, despite a small recent uptick, mortgage rates have been on a general downward trend: the average advertised two-year fixed rate for a 75% LTV mortgage has fallen from 5.19% in May 2024 to 4.60% in December 2024, while for a 90% LTV the average rate has fallen from 5.66% to 5.36% over the same period. Due to the slightly larger fall in the 75% LTV rate, the spread between the two LTV values has widened slightly over this period (from 0.47 percentage points to 0.76 percentage points).

Source: Bank of England

Data from the Moneyfacts Treasury Report^[3] shows a similar pattern, with the average 2-year fixed rate mortgage interest rate decreasing from 5.95% at beginning of July 2024 to 5.48% at the beginning of January 2025, and the average 5-year fixed-rate mortgage interest rate decreasing from 5.53% to 5.25% over the same period.

Chart 6.4 shows that the vast majority of regulated^[4] mortgages are on fixed rates. Following a period of sustained increase, there was a sharp drop in the share of new mortgages on fixed rates in Q1 2023, to 83.1% from 94.5% the previous quarter. However, following the sharp drop, the share of new mortgages on fixed rates has been growing, reaching 93.0% in Q3 2024 (Source: FCA).

Source: FCA