I see no reason to dissent from the common expectation that Bank Rate will bottom out between 3.00% and 3.25%, with at least 2 cuts of 0.25% in 2026. However, as the best 2 – 5 year fixed rate mortgages are still below Bank Rate in anticipation of further cuts, the rates at which fixed rate mortgages are offered will fall less than Bank Rate and by the end of 2026 will be priced above Bank Rate as the market perceives rates to be near the floor.
As well as its primary objective of hitting the 2% CPI target over the medium term The Bank is also targeted with supporting the economy to achieve strong and sustainable growth. This secondary objective is obviously more difficult when the Government introduces budget measures, such as last year’s large increase in Employers’ National Insurance, which have the opposite effect by disproportionately affecting the cost of employing low paid and part time staff, making it more difficult for those ready to enter the workplace, or move back into it, to do so.
However, at least such measures justify The Chancellor’s claims to claim credit for the fall in interest rates, as the weaker Government policy makes the economy, the more the MPC has to try to compensate by cutting Bank Rate!
With only a small rise of around 1.5% in house prices in 2025, but with falls in some areas and some property types, specifically flats, real house prices fell, with inflation at over 3%.
Although the increasing unemployment rate and reduced number of vacancies will reduce pressure on wage increases, next year’s increase in the various minimum wages will have the opposite effect. The increase in the National Living Wage for those aged at least 21 is 4.1% but the increase is significantly more for younger workers and the increase in the Real Living Wage, which many employers support, is 6.75%.
This will be particularly relevant for service sector inflation and of course will generally have a knock on effect further up the salary scale as some differentials need to be maintained, even though they may be reduced.
Despite fiscal drag, and with falling inflation, most employees at the lower end of the salary scale can therefore expect a real terms increase in net income as the new minimums come into effect. Couple this with the expected further reduction in mortgage rates, more realistic lender affordability stress tests following regulatory relaxation and likely further criteria improvements and an increase in house prices in excess of inflation, say around 4%, looks likely in 2026.
However, as in 2025, there are likely to be very significant regional variations, with a continued contraction of the gap between lower and higher priced areas and flats continuing to underperform.
The proportion of purchases by FTBs is likely to continue increasing, as the recent criteria improvements will be particularly helpful to that cohort, with much better availability of high LTV mortgages. In particular the new build sector should benefit with more lenders now offering up to 95% LTV on new builds, including flats in some cases, and even 100% available from Skipton with its Track Record mortgage. It would not be surprising to see more lenders offering 100% LTV mortgages in 2026, as well as other criteria enhancements.
There is of course always the possibility of some unexpected event impacting the housing and mortgage markets but politics also has that potential.
In the UK the May Welsh and Scottish elections plus the local elections in England look like being a nightmare for Labour and the question is whether Kier Starmer will survive. If he doesn’t who is elected to replace him could alter the expected trend for Bank Rate. Whether Labour elects someone from the left of the party who might be the darling of the members but would be unlikely to win a General Election, despite recapturing some Green voters, or someone like Wes Streeting from the right of the party, would have implications for the gilt market and hence mortgage rates.
In the US the November mid-terms are likely to curtail Trump’s ability to ignore the democratic process. Even though he won’t be on the ballot the popularity of the President is a major election influence and Trump’s popularity has fallen sharply since he took office. Republicans currently control both the House and the Senate, but with all House seats up for election it is very probable the Democrats will take control of the House and possibly also the Senate, although as only 35 of the 100 Senate seats will be contested this will be more difficult.
Assuming Democrats take control of the House I expect one of their early actions will be to impeach Trump, although the two thirds majority needed in the Senate to convict him means he will escape conviction. The only difficulty the Democrats are likely to have is deciding which of many choices to impeach Trump on, not whether to impeach him!
With Republications no longer controlling both Houses the market may factor in a lower risk from Trump’s maverick actions.
