Inflation Trends

The latest economic data shows inflation fell to 2.6% in March 2025, down from 2.8% the previous month and below the 2.7% that economists had been expecting. This continuing moderation in price pressures is welcome news for homeowners and prospective buyers alike.

According to Oxford Economics, weaker global demand, partly driven by higher US tariffs introduced on “Liberation Day” at the start of April, may help ease inflationary pressures in the UK further. This has prompted a downward revision for inflation forecasts through the remainder of 2025.

While UK economic growth is expected to be somewhat weaker this year, the growth in average earnings (5.6%) remains well ahead of inflation, creating a positive real wage growth environment that historically supports housing market activity.

Base Rate & Interest Rate Outlook

The Bank of England’s next Monetary Policy Committee (MPC) meeting is scheduled for May 8th, and financial markets are currently pricing in a 95% chance of a reduction to the base rate. This represents a significant shift in market expectations; before President Trump’s “Liberation Day” tariff announcements, the probability was closer to 50/50.

Markets are now pricing in three 25 basis point cuts from the Bank of England this year, which would bring the base rate down to 3.75% by the end of 2025. This should help ensure the cost of an average fixed-rate mortgage remains within the 4-5% range.

Morgan Stanley has taken an even more bullish view, suggesting the Bank of England will cut the base rate several times this year to 3.25% and forecasting further reductions to 2.75% in the first half of 2026, ultimately reaching 2% in the longer term.

Consumer Expectations vs. Reality

Despite the broad consensus among analysts expecting multiple base rate reductions this year, public perception remains notably cautious. A HomeOwners Alliance survey of 2,000 UK adults found:

• 37% expect mortgage rates to increase over the next 12 months
• Only 16% think rates will decrease
• 25% believe they will remain steady
• 22% weren’t sure

This disconnect between expert forecasts and public perception highlights the economic anxiety and uncertainty felt by many households, potentially dampening housing market sentiment despite improving fundamentals.

Current Mortgage Rate Trends

UK gilt yields have moderated following a period of volatility at the start of April, with the 10-year gilt yield falling to around 4.50%, down from a peak of 4.75% earlier in the month. The 30-year yield has also eased after previously hitting its highest level since 1998.

As of early May 2025, UK swap rates have been on a downward trend, reflecting market expectations of imminent base rate cuts by the Bank of England. This is gradually feeding through to mortgage pricing:

• The average two-year fixed rate mortgage is currently 4.69%, down 0.70% year-on-year
• The five-year option stands at 4.63%, down 0.35% from last year
• The lowest available two-year fix is now 3.75%, 0.86% lower than a year ago
• The best five-year rate has dropped to 3.83%, 0.33% lower than last year

All of the UK’s “big six” lenders – Barclays, HSBC, NatWest, Halifax, Nationwide, and Santander – are now offering fixed rates below 4%, marking a significant milestone in the mortgage market recovery.

Shifting Mortgage Patterns

An interesting trend is emerging in the relationship between short and longer-term fixed rates. The gap between two-year and five-year fixed rates is closing, with the average two-year fixed mortgage rate for those with a 40% deposit (4.18%) now actually cheaper than the average five-year fixed equivalent (4.19%).

This is the first time this inversion has occurred since the mini-Budget crisis and reflects the growing trend that it’s becoming cheaper for lenders to price shorter-term rather than longer-term deals. The global tariffs situation appears to be accelerating this trend.

The ‘effective’ interest rate – the actual interest paid – on newly drawn mortgages increased by 2 basis points to 4.53% in February, while the rate on the outstanding stock of mortgages was 3.87%, up from 3.81% in January.

Mortgage Product Availability

There are now more low-deposit mortgages available than at any time since the 2008 financial crisis, according to the latest Moneyfacts UK Mortgage Trends Treasury Report:

• For buyers with a 5% deposit, there are 442 mortgages available, the highest since March 2008 (575)
• Borrowers with a 10% deposit now have 845 products to choose from, the highest since March 2008 (957)
• Overall product choice rose month-on-month to 6,870 options, compared to 6,307 in April 2024 and the highest since October 2007 (7,421)

This expansion in mortgage availability, particularly at higher loan-to-value ratios, is a positive development for first-time buyers and those with limited deposits.

Mortgage Approvals & Transactions

UK mortgage approvals have fallen to 64,309 in March, the lowest level in eight months. This represents the third consecutive monthly decline and has prompted some commentators to suggest a market slowdown following the stamp duty changes.

However, this data likely reflects a “new normal” as the market adjusts after the artificial rush to beat the stamp duty deadline. Looking at the broader context:

• March 2025 approvals were only 1.83% down on February 2025
• Approvals remain 4.89% higher than March 2024
• They’re 0.19% above the 12-month average
• Only 1.17% lower than the 10-year March average

The consistently strong mortgage market activity since early 2024, with monthly approvals remaining above 60,000 since January 2024 despite ongoing economic uncertainty, suggests underlying market resilience.

Transaction data tells an even more positive story, with March completions reaching 177,370 – a remarkable 104% higher than March 2024, 62% higher than February 2025, and 46.78% higher than the 10-year average. Halifax reported that their customers completed more home sales in March than in January and February combined, including their busiest single day on record.

While these figures were clearly boosted by the stamp duty deadline, transaction levels for the financial year 2024-2025 are up 22.11% on the previous year and 1.51% higher than the 10-year average, indicating a healthy market overall.

Emerging Trends in Mortgage Affordability

Zoopla identifies an emerging positive trend that could support market activity in the coming months: a potential relaxation in how lenders assess the affordability of new mortgages.

While the average 5-year fixed rate mortgage is around 4.5% today, many lenders are currently ‘stress testing’ affordability at 8-9%, making it harder to secure a mortgage without a large deposit. If average mortgage stress rates were to return to pre-2022 levels of 6.5% to 7%, this could deliver a 15-20% boost to buying power.

This change would consequently support demand and sales volumes, helping to clear the stock of homes for sale, rather than driving substantial house price growth.

Conclusion

The mortgage and interest rate environment continues to improve gradually, with multiple signals pointing toward further easing in borrowing costs through 2025. The disconnect between market expectations for rate cuts and public perception presents both a challenge and an opportunity for mortgage lenders and property professionals.

While mortgage approvals have softened slightly, the broader picture of transaction volumes, product availability, and affordability trends suggests a market that has successfully navigated the stamp duty changes and is establishing a new equilibrium. The potential for lenders to adjust affordability assessments represents a significant upside risk that could unlock additional market activity in the coming months.

As we move into the summer selling season, these positive developments in the mortgage market should help sustain transaction volumes despite broader economic uncertainties.