Mortgage Market Update
The UK mortgage market has experienced further uncertainty during October 2026, with rising inflation, subdued house price growth and the Autumn Budget all influencing the outlook for buyers, homeowners and landlords.
Although the Bank of England has kept Bank Rate unchanged at 3.75%, inflation has increased to 3.5%, raising concerns that interest rates could remain elevated or potentially rise.
Higher energy prices and ongoing geopolitical uncertainty continue to influence wholesale funding costs. However, after several weeks of mortgage rate increases, pricing has shown some stability towards the end of October, with some lenders making selective reductions.
The Government has also announced its new Your First Home scheme, designed to help eligible first-time buyers purchase new-build properties with deposits as low as 2.5%.
For mortgage borrowers, the coming months will depend heavily on inflation, future Bank of England decisions and how lenders respond to changes in wholesale funding markets.
Market overview
The UK housing and mortgage markets have slowed during the second half of 2026, although there are signs that homeowners are becoming more active in reviewing their existing mortgages.
House price growth has weakened, mortgage approvals for purchases have fallen and rising inflation has reduced expectations of further short-term interest rate cuts.
Despite this, mortgage lenders remain competitive, particularly for borrowers with larger deposits or higher levels of equity.
The Autumn Budget, announced on 28 October, has also introduced changes affecting first-time buyers and property investors.
Bank Rate and interest rate expectations
The Bank of England maintained Bank Rate at 3.75% at its September meeting, with six members of the Monetary Policy Committee voting to keep rates unchanged and three voting for an increase to 4%.
The decision reflected growing concerns about inflation, particularly following increases in global energy prices.
The Bank’s next interest rate decision is scheduled for 5 November 2026.
To see how interest rates have changed over time, visit our Bank of England base rate history.
During the earlier part of 2026, financial markets were generally expecting further interest rate reductions. However, those expectations have changed as inflationary pressures have increased.
Financial markets are now considering the possibility that Bank Rate could rise again if inflation remains persistently above the Bank of England’s 2% target.
The Bank faces a difficult decision. Higher interest rates may help control inflation, but they can also increase borrowing costs for households and businesses, potentially weakening economic activity.
Future decisions will depend on inflation, wage growth, employment figures and developments in global energy markets.
Swap rates and mortgage rates
Fixed mortgage rates continue to be influenced by changes in wholesale funding costs rather than Bank Rate alone.
Mortgage lenders use financial markets, including swap rates, when determining the pricing of fixed-rate mortgage products.
Swap rates reflect market expectations for future interest rates over periods such as two and five years.
During recent months, swap rates have increased as financial markets adjusted their expectations for future Bank Rate.
This has placed upward pressure on fixed mortgage pricing, with several lenders increasing rates despite Bank Rate remaining unchanged.
However, October has also demonstrated that lender pricing does not always move in the same direction.
Towards the end of the month, some lenders reduced selected mortgage rates, while many of the most competitive deals remained broadly unchanged.
Lenders must balance wholesale funding costs against competition, lending targets and the types of borrowers they want to attract.
This can create differences in pricing between lenders, even where their underlying funding costs are similar.
For borrowers, it means that waiting for a Bank of England announcement is not necessarily the best way to judge when mortgage rates might change.
Inflation
UK inflation increased again in September, adding to concerns about the outlook for interest rates.
According to the Office for National Statistics, Consumer Prices Index (CPI) inflation reached 3.5% in September 2026, up from 3.1% in August.
This places inflation considerably above the Bank of England’s 2% target.
For historical inflation figures and previous trends, visit our UK inflation history.
Transport costs, particularly motor fuels, were the largest contributor to the increase in annual inflation.
Underlying inflation measures also rose during September.
Core CPI inflation, which excludes energy, food, alcohol and tobacco, increased from 2.6% to 2.8%.
Services inflation increased from 3.4% to 3.7%.
These figures suggest that price pressures are not limited to energy costs alone.
The Bank of England will be particularly concerned about whether higher energy and transport costs begin feeding through into other prices and wage demands.
If businesses face higher operating costs, they may increase prices to maintain profitability. This could make it more difficult for inflation to return to the Bank’s target.
For mortgage borrowers, persistently high inflation could mean that interest rates remain elevated for longer than previously expected.
Economic activity
The UK economy has continued to grow, although the latest monthly figures suggest growth remains modest.
According to the Office for National Statistics, UK GDP increased by 0.1% in August 2026, following growth of 0.4% in July.
However, looking at a longer period, GDP increased by 0.7% in the three months to August compared with the preceding three months.
Services output increased by 0.9% over the three-month period, while production fell by 0.2% and construction declined by 1.0%.
These figures suggest that the economy has remained relatively resilient despite higher borrowing costs and inflationary pressures.
Economic growth can support employment, household incomes and confidence in the housing market.
However, stronger economic activity may also influence future Bank of England decisions if it contributes to persistent inflation.
The challenge is to bring inflation under control without placing unnecessary pressure on economic growth.
Jobs and wage growth
The UK labour market remains relatively stable, although employers are showing signs of caution when recruiting.
The latest Office for National Statistics figures show that unemployment stood at 4.7% during June to August 2026, slightly lower than in the preceding quarter.
Annual growth in regular earnings, excluding bonuses, was 3.7% over the same period.
Meanwhile, the number of job vacancies fell to approximately 691,000 during July to September, the lowest level since early 2021.
A reduction in vacancies can indicate weaker demand for new employees, although the overall employment market has remained reasonably resilient.
Wage growth is particularly important when considering future interest rates.
If wages increase significantly, businesses may face higher costs, potentially contributing to inflation.
However, slower wage growth can reduce pressure on prices over time.
For mortgage applicants, employment stability and income remain central to affordability assessments.
Lenders consider earnings, existing financial commitments and the proposed mortgage payments when determining how much someone can borrow.
House prices and mortgage activity
UK house price growth slowed further during October.
According to the Nationwide House Price Index, the average UK property price was £273,566 in October 2026.
Annual house price growth slowed to 0.5%, down from 0.8% in September.
House prices were unchanged during October on a seasonally adjusted monthly basis.
This represents the slowest annual house price growth since January 2024.
For further information about historical property values, visit our UK house price history.
Higher mortgage rates, affordability pressures and uncertainty about the wider economy appear to be weighing on buyer confidence.
However, house price performance continues to vary between regions and property types.
Some buyers may benefit from increased negotiating opportunities where properties are taking longer to sell.
Mortgage activity has also weakened.
The Bank of England’s September lending figures, published on 29 October, showed that mortgage approvals for house purchases fell to approximately 53,400, compared with 54,800 in August.
This was below the previous six-month average of approximately 58,800.
However, remortgage approvals increased to 42,600 in September, up from 34,000 in August.
These figures exclude product transfers with an existing lender, meaning they do not capture all borrowers reviewing their mortgage arrangements.
The increase in remortgage approvals suggests more homeowners are exploring refinancing options, potentially as existing fixed-rate deals approach expiry.
Autumn Budget 2026 – Your First Home scheme
One of the most significant housing announcements in the Autumn Budget was the introduction of the Government’s new Your First Home scheme.
The scheme is designed to help eligible first-time buyers in England purchase new-build properties with smaller deposits.
Under the proposals, buyers will be able to contribute a minimum deposit of 2.5% of the purchase price.
The Government will provide an equity loan worth 20% of the property value, with the remaining amount funded through a repayment mortgage from a participating lender.
For example, someone purchasing a £300,000 property could contribute a £7,500 deposit, receive a £60,000 Government equity loan and obtain a £232,500 mortgage.
The equity loan will be interest-free for the first five years.
Interest will then be charged at 1.5% in year six, increasing to 3% from year seven.
Importantly, the equity loan is linked to the property’s value. If the property increases in value, the amount required to repay the Government’s share will also increase. Equally, if the property decreases in value, the amount owed could reduce.
The scheme will also have eligibility restrictions.
Household income must not exceed £110,000 outside London or £140,000 within London. Local property price caps will apply, and purchases must involve qualifying new-build homes.
Applications are expected to open in February 2027, with the first purchases anticipated from April 2027.
For first-time buyers who are struggling to save a larger deposit, the scheme could provide another route into homeownership.
However, borrowers will need to consider the future cost of the equity loan, as well as the mortgage, rather than focusing solely on the smaller initial deposit.
Autumn Budget 2026 – Changes for landlords
The Autumn Budget also announced changes to the taxation of rental income, which could affect property investors.
From April 2027, the Government intends to increase the income tax rates applying to taxable property income.
The new property income tax rates will be:
- Basic rate: 24%
- Higher rate: 44%
- Additional rate: 49%
These changes are relevant to individual and partnership landlords in England, Wales and Northern Ireland, with the position in Scotland subject to its own tax arrangements.
Landlords holding properties through limited companies are subject to a different taxation framework.
For landlords who own properties personally, higher income tax rates could reduce their after-tax rental returns.
This makes it particularly important to consider rental income, mortgage interest costs, property expenses and future tax liabilities when assessing an investment.
Some investors may also review whether personal ownership or a limited company structure is appropriate for future purchases.
However, changing ownership structures can create additional tax costs and other considerations, so independent tax advice should be obtained before making any decisions.
Mortgage product choice and lender changes
Mortgage product availability remains competitive, although pricing continues to change as lenders respond to wholesale funding costs and market conditions.
The final week of October brought some stability to the lowest fixed mortgage rates.
Most leading deals remained unchanged, while A handful of lenders actually made reductions across selected products.
This follows a period in which several lenders increased fixed mortgage rates in response to higher funding costs.
Different lenders are targeting different types of mortgage business, which can produce noticeable differences in pricing depending on the borrower’s circumstances.
Lenders may also assess income differently, especially for self-employed applicants, company directors and those with more complicated financial arrangements.
Comparing mortgage products therefore involves more than identifying the lowest advertised interest rate.
Arrangement fees, incentives, early repayment charges, flexibility and the total cost over the initial mortgage period should all be considered.
For borrowers whose fixed-rate deals are approaching expiry, it is also important to compare staying with their existing lender against remortgaging to a different provider.
A product transfer may sometimes be more competitive once all costs are considered, while another lender could offer better terms or greater flexibility.
What does this mean for mortgage borrowers?
Current market conditions present different considerations depending on whether you are buying your first home, moving property, remortgaging or investing.
For first-time buyers, slower house price growth may create opportunities to negotiate on purchase prices.
The new Your First Home scheme could also benefit eligible buyers considering new-build properties, although the scheme will not be available until 2027.
For home movers, mortgage affordability remains important, particularly where a new mortgage involves borrowing more or replacing an existing lower fixed rate.
For landlords, mortgage costs and the announced changes to rental income taxation may affect the profitability of existing and future investments.
For homeowners approaching the end of a fixed-rate mortgage, reviewing their options early can provide valuable flexibility.
Many mortgage lenders allow a new product to be arranged several months before the current deal expires.
At Kerr & Watson, we generally recommend reviewing mortgage options approximately six months before the existing rate ends.
This allows time to compare the existing lender’s product transfer options against remortgaging elsewhere.
Where appropriate, a new mortgage can be secured in advance, helping protect against potential interest rate increases.
We can also continue monitoring mortgage pricing before completion.
If a cheaper or more suitable rate becomes available, we can review whether changing products would be beneficial, subject to lender requirements and any associated costs.
This approach can be particularly valuable when the direction of interest rates is uncertain.
Kerr & Watson’s view
October has been another uncertain month for the UK mortgage market.
Inflation has increased to 3.5%, annual house price growth has slowed to just 0.5%, and mortgage approvals for purchases have fallen.
However, the picture is not entirely negative.
Mortgage lenders remain competitive, some fixed rates have recently been reduced and remortgage activity has increased.
The Government’s Your First Home scheme may also help some first-time buyers enter the property market during 2027, although it is important to understand the long-term implications of an equity loan.
The biggest uncertainty remains the direction of interest rates.
With inflation above target and wholesale borrowing costs remaining elevated, borrowers should not assume that mortgage rates will automatically fall in the coming months.
For homeowners approaching the end of a fixed-rate deal, early planning remains sensible.
Securing a mortgage in advance may provide some protection against rising rates while allowing opportunities to review available products if pricing improves.
We are seeing more customers consider tracker mortgages due to the current difference in pricing compared with fixed rates. However, it is important to remember that tracker rates can increase, meaning monthly mortgage payments could rise.
At Kerr & Watson, we compare the cost of staying with your current lender against moving to another lender, taking account of interest rates, fees, flexibility and your individual circumstances.
Whether you are buying your first home, moving property, remortgaging or investing in buy-to-let property, our team can help you understand the mortgage options available and find a suitable solution for your circumstances.
Speak to Kerr & Watson today to discuss your mortgage requirements.
