Mortgage rates have fallen to their lowest level since before the mini-budget as lenders fight for customers ahead of expected interest rate cuts.
The average two-year fixed rate dropped to 4.86 per cent last week, according to the analyst Moneyfacts, while the average five-year fixed rate is 4.85 per cent. These are the lowest rates recorded since October 2022, when unfunded tax cuts in the September mini-budget spooked the markets and sent mortgage rates soaring. It is the first time that the average five-year fixed-rate mortgage has fallen below 5 per cent since May 2023.
More than 20 banks dropped their rates last week, with the Bank of England expected to cut the base rate from 4 per cent to 3.75 per cent at its next monetary policy committee meeting on December 18. It has cut the base rate four times in the past year.
Banks are also pricing in more cuts next year, which is reflected in falling swap rates — the rates at which banks lend to each other, which are based on expectations of what Bank rate will be. Swap rates are used to price fixed-rate mortgage deals.
Adrian Anderson from the mortgage broker Anderson Harris said: “The main reason we are seeing these reductions is that swap rates are falling, which shows that markets feel quite confident that there will be base rate reductions in the future. The markets are also pricing in two base rate reductions next year.
“There is a price war going on that started a couple of months ago. The banks have an appetite to lend, and they price as competitively as possible to get new business.”
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Last week 24 banks announced cuts to their mortgage rates, according to Moneyfacts, with some slashing fixed rates by up to 0.35 percentage points. Rachel Springall from Moneyfacts said: “There were double the number of lenders making rate tweaks compared with the week before. As swap rates have been falling, alongside expectations for a base rate cut this month, it’s perhaps no surprise to see so many lenders improving their range.”
Nationwide reduced the rates of some of its products by up to 0.21 percentage points. Its lowest rate, a two-year fixed rate with a 60 per cent loan-to-value, was 3.58 per cent — the lowest rate it has offered for a product since September 2022. Barclays cut some rates by 0.18 percentage points, HSBC dropped some by 0.12 percentage points, and some of Natwest’s rates fell by 0.2 percentage points.
The UK housing market had suffered a “notable cooling” before the autumn budget
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First Direct made the biggest cuts, Moneyfacts said, with some of its products 0.35 percentage points lower than the week before.
Mortgage rates were at record low levels, below 1 per cent, while the Bank of England base rate was at 0.1 per cent between March 2020 and November 2021. They had started rising before the mini-budget, but surged after September 2022 and went even higher the next summer because of worries over persistently high inflation. In August 2023 the average five-year fixed rate hit 6.85 per cent, and the average two-year fix peaked at 6.22 per cent, according to Moneyfacts.
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Anderson said that banks are pricing in more rate cuts next year, particularly after the chancellor, Rachel Reeves’s, budget last month. “While many people might have thought the budget was disappointing in terms of tax increases, from a mortgage interest rate perspective it wasn’t inflationary. This meant the markets reacted quite positively, and this has helped the mortgage market.”
David Hollingworth from the broker L&C Mortgages said the fall in buyer activity was leading to banks being more competitive on price as they fight for market share. He said: “You have got lenders competing hard and keeping their margin really quite skinny. This means that when there is an improvement in outlook, it passes on quite quickly to customers.”
