How Falling Mortgage Rates Spell Big Wins for Investors

New research suggests that the UK property market could experience a significant boost in 2025. Should mortgage rates fall below 3 per cent by mid-next year, as forecasted, it could lead to increased buyer confidence and market activity, with the average cost of a mortgage potentially dropping by over £1,500 annually.

Andrew Bailey, Governor of the Bank of England, has indicated that the bank may pursue more aggressive rate cuts in the coming months. Mortgage experts predict that this could result in rates as low as 2.75 per cent by the middle of 2025, potentially alleviating the current strain of higher borrowing costs for property buyers.

The research shows that, with the current average mortgage rate at 4.14 per cent, a typical buyer is paying £1,164 per month on a full mortgage repayment. This is based on a 75 per cent loan-to-value mortgage, where the loan amounts to £217,292, with a 25 per cent deposit on an average UK property price of £289,723.

At a predicted rate of 2.75 per cent, the same buyer would pay just £1,034 per month for their mortgage, representing a monthly saving of £130 compared to current repayments. Over the course of a year, this would equate to £1,557 in savings.

However, house prices are also expected to rise, with the researchers forecasting a 3.2 per cent increase by mid-2025, bringing the average UK property price to £298,866. Despite this potential price increase, falling mortgage rates could reduce the financial burden on buyers.

Colby Short, Co-founder and CEO of GetAgent.co.uk, which conducted the research commented: “The Bank of England has been vocal in its intentions to cut rates further, which should see mortgage rates fall to below 3 per cent by mid-2025. This will improve affordability and drive increased buyer demand, which could lead to further growth in property prices.”

What could falling rates mean for the buy-to-let market?

Falling mortgage rates could have a positive impact on rental yields for property investors in a few ways:

1. Lower mortgage costs: With mortgage rates potentially dropping, property investors could see a reduction in their financing costs. This means that even with slightly higher property prices, the cost of servicing a mortgage would be lower, allowing investors to retain a higher portion of rental income as profit, thus boosting rental yields.
2. Increased buyer confidence reduces rental stock: Lower mortgage rates may lead to increased activity in the property market, as more people feel confident about purchasing property. This could lead to a rise in demand for properties, which in turn may drive up rental prices (and therefore yields) as rental stock reduces.
3. Rising property values offset by lower mortgage costs: While the forecasted property price increase of 3.2 per cent in mid-2025 might typically compress yields, the lower mortgage rates could offset this effect, helping investors maintain or even improve their returns despite rising property values.
4. Continued demand in high-value areas: While more buyers may enter the market as mortgage rates fall, property prices in expensive areas will likely remain out of reach for many. This means rental demand will stay strong, particularly in prime locations where affordability barriers to homeownership persist. For investors in high-value areas, this continued demand ensures a steady stream of tenants and consistent rental income despite broader market shifts.

Overall, investors who can lock in lower mortgage rates may see their rental yields improve due to reduced financing costs, despite the potential for property price growth.