Mortgage rates in the UK are experiencing a significant decline, largely due to lenders vying for customers ahead of expected interest rate cuts. Recently, the average two-year fixed mortgage rate decreased to 4.86%, while the average five-year fixed rate fell to 4.85%. These figures represent the lowest levels since October 2022, when the market reacted negatively to unfunded tax cuts introduced after the mini-budget.
Recent Mortgage Rate Trends
For the first time since May 2023, the average five-year fixed-rate mortgage is below 5%. Over 20 banks lowered their rates last week, driven by a projected cut in the Bank of England’s base rate from 4% to 3.75%, scheduled for discussion on December 18. This marks the fourth base rate cut by the Bank within a year.
Impact of Swap Rates
Analysts note that falling swap rates, which banks use to determine fixed-rate mortgage pricing, have contributed to the decrease in mortgage costs. Adrian Anderson, an expert from Anderson Harris, highlighted that the market’s confidence in future rate reductions is fostering this trend. He stated, “There is a price war going on, and banks aim to lend competitively to attract new business.”
Bank Rate Cuts and Market Reactions
Recently, 24 banks have made cuts to their mortgage rates, with some reducing fixed rates by as much as 0.35 percentage points. Rachel Springall from Moneyfacts commented on the increased activity among lenders, noting that the recent fluctuations in swap rates and base rate expectations led to more competitive offerings.
- Nationwide reduced rates by up to 0.21 percentage points, with its lowest two-year fixed rate at 3.58%, the best since September 2022.
- Barclays cut some rates by 0.18 percentage points.
- HSBC and Natwest also made notable reductions, with Natwest’s rates dropping by 0.2 percentage points.
- First Direct announced the largest cuts, reducing some products by 0.35 percentage points.
Historical Context of Mortgage Rates
Mortgage rates previously reached unprecedented lows, below 1%, between March 2020 and November 2021. After beginning to rise before the mini-budget, they soared in response to inflation concerns. In August 2023, the average five-year fixed rate hit 6.85%, while the two-year fixed rate peaked at 6.22%.
Future Outlook for Mortgage Rates
Looking ahead, there is optimism in the market regarding the potential for further rate cuts next year, especially after Chancellor Rachel Reeves’ recent budget announcement. David Hollingworth from L&C Mortgages indicates that decreased buyer activity has pushed banks to compete aggressively for market share, benefiting consumers.
The ongoing competition among lenders and the anticipated easing of interest rates are likely to create a favorable environment for potential homebuyers in the coming months.
