Last week’s economic indicators followed an anticipated trajectory. Core inflation slightly exceeded projections, while services inflation exhibited resilience. Headline inflation, however, registered slightly lower than the expected 3.4%. Responding predictably, the Bank of England maintained the bank rate at 5.25%.

Considering the UK housing market’s recovery phase post a subdued 2023, the absence of major announcements possibly bodes well. In 2023, high mortgage rates and persistent inflation resulted in a 20% decline in transactions and a 5% decrease in average prices by September.

Optimism emerged in the final quarter of 2023 as headline inflation receded swiftly, and money markets implied five anticipated rate cuts of 0.25% for 2024. However, expectations tempered since January due to sustained underlying inflation, with current forecasts hinting at approximately three cuts.

A Knight Frank analysis of mortgage data offers insights into the impending financial strain on borrowers. Many borrowers will face the end of relatively favorable two-year fixed-rate deals secured during the early stages of rising interest rates in 2022. The consecutive rate hikes between December 2021 and August 2023 elevated the average rate on a two-year mortgage (75% loan-to-value) from 1.57% to 6.18%.

By the end of 2024, approximately 45% of fixed-rate mortgages initially below 2% will diminish to 26%. Moreover, by the conclusion of 2024, deals agreed upon at rates exceeding 4% will constitute one-fifth of all fixed-rate mortgages due for renewal, increasing to 33% by the end of 2025.

The resurgence of two-year fixed mortgages reflects shifting borrower preferences, with Simon Gammon, head of Knight Frank Finance, noting the narrowing gap between two-year and five-year fixes. Borrowers increasingly opt for two-year fixes to potentially secure lower rates in the future.

The predominance of fixed-rate mortgages compared to variable rates in recent years suggests a gradual integration of financial strain into the system. With over 90% of mortgages being fixed-rate before the pandemic, the absence of a sudden escalation in mortgage rates mitigates the risk of drastic declines in house prices. Furthermore, the financial resilience of lenders, in contrast to the 2008/09 financial crisis, mitigates the likelihood of widespread foreclosures.

Despite the overall stability depicted, borrowers acquiring higher-rate mortgages will encounter challenges, as illustrated in the data, indicating prolonged moments of financial strain for the coming years.