Mortgage Rates in 2022: What Can We Expect From the Housing Market?
- By Bilal Hafeez
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- 3 min read
What is a mortgage rate?
A mortgage rate is the rate of interest that a bank charges on a mortgage. Lenders determine mortgage rates, and they can either be fixed or variable. A fixed-rate does not fluctuate with the benchmark interest rate set by central banks, but a variable rate mortgage does.
Summary
- Mortgage interest rates are rising as central banks tighten monetary policy to quell rampant inflation in the US and UK.
- Markets and economists expect the Fed and BoE to hike interest rates further in the near term, meaning mortgage rates could go up in 2022. Out to 2023, the policy rate picture is less clear.
Can Refinancing Help With Current Mortgage Rates?
Central banks worldwide have been raising interest rates to curb inflation. This has directly impacted people’s finances as borrowing costs start to increase. The largest component of this is the interest paid on mortgages. So, what do you do when your mortgage comes up for renewal?
Should you fix rates at current levels, thinking interest rates could get much higher? Or should you go for a flexible rate more closely tied to the central bank policy rate under the expectation that central banks have completed most of their rate increases and so rate cuts could be on the horizon?
One way to answer this question is to look at forecasts of the path of central bank policy rates. We can look at what the consensus of economists is forecasting. We can also look at what interest rate markets themselves are pricing for the rate path. So, what are these currently telling us for the Fed and the Bank of England (BoE)?
US Interest Rates
Starting with the US, the current Fed policy rate is 1.75%. Economists expect the rate to reach around 3.6% by the end of this year before the Fed cuts rates to 3.3% at the end of 2023 (Chart 1, Table 1). Meanwhile, interest rate markets expect a similar hike to around 3.6% by the end of this year, but more cuts in 2023 to 3.1%. But broadly, both economists and interest rate markets expect similar paths.
Meanwhile, mortgage rates in the US are the highest they have been in a decade, and home prices are also rising.
UK Interest Rates
As for the UK, the current BoE policy rate is 1.25%. Economists expect the rate to reach around 2.2% by the middle of 2023 before the BoE cuts rates to 2% at the end of 2023 (Chart 2, Table 1). However, interest rate markets expect a more aggressive path, with policy rates reaching 3.1% by the end of 2022 before they fall to 2.5% by the end of 2023.
What Does All This Mean for You?
The bottom line is that both economists and markets expect the Fed to hike rates to around 3.6% before cutting, while for the BoE, they expect a move to between 2.1% and 3.1%. So further hikes are expected in the near term.
The larger debate appears to be on what happens in 2023. Will recession concerns dominate to bring interest rates back down (consensus view)? Or could inflation still dominate and interest rates go higher (i.e., consensus is wrong)? Our bias is towards the latter view. But the macro picture is changing quickly, so watch this space.
Table 1: Fed And BoE Expectations
| Current | End-2022 | Mid-2023 | End-2023 | ||
|---|---|---|---|---|---|
| Fed | Market | 1.75 | 3.6 | 3.4 | 3.1 |
| Economists | 1.75 | 3.6 | 3.6 | 3.3 | |
| BoE | Market | 1.25 | 3.1 | 3.1 | 2.5 |
| Economists | 1.25 | 2.1 | 2.2 | 2.0 | |
Source: Macro Hive, Bloomberg
The State of the UK Market
In the UK, property prices have soared over the past few years, but this trend could be reversing. NatWest Group Plc reported net mortgage growth of £3.3bn in Q2 2022, down £0.3bn from Q2 2021. Meanwhile, Barclays Plc saw almost stagnant growth in home loans. With the BoE expected to hike interest rates in August by 50bp, many are rushing to lock in low-rate mortgages.
Still, the current rates are elevated: borrowers could secure a five-year fixed rate mortgage at under 1% in September 2021, but now they would be looking at 3% or higher. Also, the number of residential mortgage products on offer is down 3.5% from the start of July, meaning deals are disappearing.
Will the US Housing Market Crash in 2022?
In the US, the residential real estate market is returning to pre-pandemic trends. Very low vacancy rates and inventory, with unfinished housing in line with historical norms, suggest an impending crash is unlikely. However, the Fed has no choice but to engineer a sharp real estate slowdown to realign aggregate demand with aggregate supply and stabilize inflation.
FAQ
Why are mortgage rates going up?
Mortgage rates are rising because central banks are hiking interest rates to tackle inflation. This increases borrowing costs in the economy, the largest component of which is mortgage rates.
Will mortgage rates go down?
It is unlikely that mortgage rates will fall in 2022. Both markets and economists anticipate further interest rate hikes from central banks, meaning mortgage rates are likely to rise as well.
How high will mortgage rates go?
Mortgage rates rise as interest rates rise, so a mortgage rates forecast depends on expectations for central bank hiking. The average 30-year fixed rate mortgage in the US was around 5.5% in July 2022, but some economists expect it to go higher in 2022.