What Happens To Mortgage Rates In A Recession? (2022)

Unfortunately, recessions are part of the economic cycle so are inevitable. However, knowing what happens to mortgage rates in a recession and whether they go up or down can make sure you can properly prepare.

In a recession mortgage rates typically go down as governments try to stimulate the economy by reducing interest rates. This is to combat the lower economic growth driving uncertainty around house prices and job losses which can halt demand and cause house prices to decline.

In this post, I’ll run through what happens to mortgage rates for both fixed-rate and variable-rate mortgages, and critically, ways to can make sure you can afford your monthly mortgage payments and what happens if you can’t.

What Happens To Fixed-rate Mortgages In A Recession?

Fixed-rate mortgages have the mortgage rate set at the same percentage for the initial term of your mortgage, so in a recession, the interest rate and mortgage payments will remain the same. This initial term can be between 2 and 40 years depending on the mortgage product that you have chosen.

After your fixed-rate initial term has come to an end you’ll be moved onto a variable-rate mortgage which I’ll explain below.

do mortgage rates go up or down in a recession?

What Happens To Variable-rate Mortgages During A Recession?

In a recession, variable-rate mortgage interest rates will change depending on how the government set the base interest rates. Most variable mortgages are linked to the government set base rate, for example, base rate plus 1.5% so if the base rate is 1% your mortgage interest rate will be 2.5%.

This can be good news for those on variable rate mortgages if the government decide to lower the base rate to increase demand in the economy, as that will lower the mortgage interest rate and lower the monthly mortgage payments.

If you are on a fixed-rate mortgage, you can decide to remortgage to take advantage of the lower interest rates. However, just make sure you check whether there are any early repayment charges as that may outweigh any benefits of a lower interest rate.

However, depending on the circumstances of the recession, the government may keep the interest rates the same or even increase them which could increase your mortgage payments. Looking at what happened in previous recessions will help, so here’s what happened to mortgage interest rates during the 2088 recession.

Mortgage Interest Rates During Recession In 2008

During the 2008 recession, mortgage interest rates dropped by 4.5% as the base rate dropped from 5% to 0.5% in 6 months. Mortgage rates typically are between 0.5% and 3% higher than the base rate depending on the mortgage lender and the creditworthiness of the borrower.

Below is a table showing interest rates dropping from 5% to 0.6% in 6 months. Good news if you were on a variable-rate mortgage, however bad news if you were on a fixed-rate mortgage as you weren’t able to benefit from the decrease in interest rates.

Interest Rates During 2008 Recession by MonthInterest Rate
September 20085.0%
October 20084.5%
November 20083.0%
December 20082.0%
January 20091.5%
February 20091.0%
March 20090.5%
Interest rates during 2008 recession – source: BBC News

Ways To Make Sure You Can Pay Your Mortgage During A Recession

If the economy crashes and demand reduces during a recession, businesses everywhere are at risk of suffering a fall in profits. This leads a lot of businesses down the route of redundancy, so for business owners and employees, their income is at risk.

Making sure you can afford your monthly mortgage payments is vital, so if the worst were to happen you know you are prepared and aren’t at risk of losing your home. Here are some ways you can pay your mortgage during a recession.

  • Create a budget to reduce other expenses. Creating a monthly budget can help you reduce unnecessary expenses and prioritise your money in critical areas such as your mortgage and living costs. This doesn’t mean you have to live on rice and beans, however, it will definitely help give you peace of mind knowing where you could save money in the event of a recession or job loss.
  • Focus on building an emergency fund. Linked with creating a monthly budget, if you can start building up some savings so if you were to lose your income for a short period of time you have some money set aside to fall back. This can be essential and can give you the breathing space to find the right job instead of having to take the first thing available.
  • Remortgage to reduce monthly mortgage payments. If you have a good enough credit score to remortgage, you can remortgage to a lower interest rate if one is available, or increase the time over which your mortgage is repaid. Both of these options will reduce your monthly mortgage payment and help make it easier to pay each month.
  • Plan ahead for finding a new job. Keeping your CV up to date and your eye on the market for other opportunities can allow you to react quickly if you are made redundant. Depending on how long you’ve been working for your current employer, if you were made redundant you could get a nice redundancy payout, however, that can quickly be spent so getting a new job will be a priority. You may even surprise yourself and find a better job in the process which can increase your income.

What Happens If You Can’t Pay Your Mortgage During A Recession

If you can’t pay your mortgage during a recession there are a number of things that will happen such as receiving late payments fees, negative impacts on your credit score and the risk of losing your home through foreclosure.

  • Late payment fees. If you pay your mortgage late, the mortgage lender will charge you a late payment fee which is typically around 3% to 6% of your monthly payment. Some lenders give you a grace period of up to 15 days without being penalised however will depend on the lender.
  • The negative impact on your credit score. Missing one or more mortgage payments will have a negative impact on your credit score. How much of an impact will depend on how much credit history you currently have and whether it’s already in good standing. Avoiding a negative impact on your credit score is essential as it can prevent you from remortgaging as you reduce your eligibility as a borrower in the eyes of other lenders, which can reduce your options.
  • Receiving payment demand letters from your mortgage lenders. When you start missing mortgage payments, your mortgage lender will send payment demand letters which will also include ways to contact them for support.
  • Support from your mortgage lender. Your mortgage lender has a vested interest in helping you pay your mortgage as they’re making money off the interest payments and risk losing money if you stop. If you think there is a chance you could miss a payment, make sure to speak to your mortgage lender as they may be able to offer you some options to help.
  • Risk of mortgage lender pushing for foreclosure. If you miss 3 to 6 monthly mortgage payments, your mortgage lender may push forward with foreclosure proceedings. These can take months to complete before you’re forced to leave your home, however, this is where the mortgage lender seizes control of the property to sell and recover their investment. This is a last resort for the mortgage lender so make sure to speak to them to try and come to a resolution.

I’ve written a more in-depth post about how late you can pay your mortgage without incurring a penalty that you may find useful.

What Happens To House Prices In A Recession

In a recession, house prices typically decline as demand falls due to uncertainty in the market and people losing their jobs. House prices in some areas of high demand can remain constant, such as major cities, especially if people start moving there to try and find work.

As house prices decline, that can put people at risk of moving into negative equity, where they owe the mortgage lender more than the property is worth if they were to sell it.

If you owe your mortgage lender more than your property is worth it is extremely risky for the mortgage lender. This is because if you were to default on your mortgage payments, the lender would struggle to recover their investment. This is one of the leading factors behind why 100% mortgages are practically removed from the market and why 5% deposit mortgages are difficult to obtain.

However, a recession can be an excellent time to buy a property as house prices can be lower and interest rates are reduced. This means when the recession end and house prices start to go up again, you can benefit from the price growth.

Summary

Overall, mortgage rates typically go down in a recession, for example in the 2008 recession mortgage interest rates dropped by 4.5% shown earlier in the post. However, if you’re on a fixed-rate mortgage your mortgage rates and monthly mortgage payments will remain the same unless you remortgage.

Inflation is another key factor that can influence mortgage rates and house prices. I’ve written a more in-depth post about whether mortgage rates increase with inflation that you may find interesting.