This week, Bank of England Governor Andrew Bailey told MPs that fixed mortgage rates had fallen from highs seen in October following the mini budget.
“We’ve seen that new fixed rate mortgage rates have since come down, both for the low-risk end of the mortgage market – I’m talking about a loan below 75% to value here – and for the lower end of the mortgage market. high risk,” he said. said.
“We’ve seen a correction there, and it’s benefiting people looking for mortgages.”
Rates have fallen rapidly since November of last year. On November 1, the average rate for a two-year fixed mortgage was 6.47%, but by January 20, it had fallen to 5.53%.
Falling: Fixed mortgage rates have been falling steadily since late November and are expected to fall back below 4%
On a loan of £200,000, the drop will result in cheaper mortgage payments of £115 per month.
On the five-year patches, the rate cut from 6.32% to 5.3% saves the owner £204 per month.
Most end-of-year forecasts had rates in the 4-5% range. But with the cheapest five years around 4.2% and the falls showing no signs of stopping, could they drop further?
>> Nationwide and Halifax CUT Mortgage Interest Rates: Is This the Beginning of a “Price War” and Will Borrower Costs Continue to Fall?
What are the best mortgage rates on offer?
Current deals for those with 40% deposits include a rate of 4.19% from the Yorkshire Building Society on a five-year solution and 4.49% for a two-year deal from the Bank of Ireland.
For 10-year fixed rates, Halifax offers an even cheaper rate of 4.04% – although all of these offers come with fees that will increase the overall cost.
Jane King, mortgage and capital release adviser at mortgage company Ash-Ridge, says: “The best deals are for buyers or homeowners with large deposits, as you would expect.
“If you want a five-year fixed, the offer with Yorkshire is worth considering.”
Ups and downs: Mortgage rates have been steadily rising since the Bank of England started raising the base rate. They then increased after the mini budget, but are now slowly decreasing
Additionally, major lenders including Halifax, Nationwide and The Mortgage Lender have all cut rates.
Nationwide cut rates across its entire product line by up to 0.2%, while The Mortgage Lender cut prices by up to 0.4%.
Will we see rates drop below 4% this year?
“I think we’re well and truly into a rate war,” said Matt Coulson, director and principal at mortgage broker Heron Financial.
“Lenders are reacting to the downturn in business at the end of last year and they can only really compete on rates because you can’t do much on criteria. So if they want more business, they have to make their products cheaper.
John Charcol’s mortgage technical adviser, Nicholas Mendes, says mortgage rates are falling in part because swap rates have continued to fall in recent weeks.
Swap rates are an agreement in which two counterparties, such as banks, agree to exchange one stream of future fixed interest payments for another stream of variable payments, based on a set price. They tend to show where the markets think mortgage rates are heading in the longer term.
“Lenders theoretically could have passed on deeper reductions to fixed rates sooner, but the impact this could have had with existing mortgage applications seeking to change their rate to a lower rate, as well as taking new business would have affected their service levels,” Mendès said.
“As a result, we have seen small reductions on a weekly or fortnightly basis.
“With the time it takes for lenders to process a mortgage, we’re back to a period of competition,” he says.
Chris Skyes, technical director at Private Finance, says it’s inevitable that rates will drop below 4% – but when that will happen is less clear.
‘Unfortunately, everyone’s guessing – but with 10-year mortgages closer to less than 4% and swaps in this space more stable and lower than the previous weeks and months, it is possible that lenders will cut rates further to attract long-term business,’ he says.
“Lenders could even cut below 4% as a sort of loss leader or ‘break even’ product just for the title. We have seen this before.
However, the Bank of England’s Monetary Policy Committee meets in two weeks and is expected to raise the key rate by 0.5% to 4%, thus continuing its fight against inflation.
Big move: Bank of England set to raise interest rates to 4% in fortnight as it steps up battle against stubbornly high inflation
The Bank has already raised rates from a record low of 0.1% in December 2021 to 3.5% now in a desperate effort to fight inflation.
The CPI inflation figure came in at 10.5% in December, down from 10.7% the previous month and also from the 41-year high of 11.1% recorded in October.
Rising interest rates have pushed up the cost of mortgages and other loans, so borrowers will be watching the Bank’s decision on February 2.
> Check out the best fixed rate mortgages you could apply for
Should Borrowers Consider a Follow-Up Mortgage?
Another option for those looking to cut costs might be to consider variable rates. This could allow them to hang on to a fixed rate until the rate chart becomes clearer.
Mike Staton, Director of Staton Mortgages, said: “Trailer mortgages with no prepayment charges still seem to be popular as customers use them to bridge the gap between today’s high fixed rates and a potential return. at fixed rates below 4% over two years in early 2024.
“While 10- and 5-year fixed rates are expected to drop below 4% in time for the summer, buyers should expect huge fees with these products as lenders will want to make money somewhere.
“If you have a 40% deposit, trackers are currently available at 3.74%”.
How about a cheap 10 year fixed mortgage?
A number of lenders, including Halifax, Leeds Building Society and Yorkshire Building Society, are now offering 10-year fixed products at cheaper rates than shorter-term deals.
Indeed, 10-year interest rate swaps are currently lower than their two- and five-year equivalents, which means the market thinks interest rates will be lower in 10 years than in two and five years. .
However, it is not that simple. It’s hard to predict where interest rates will be a year from now, let alone a decade from now, unforeseen events can upend the market – as the mini budget has proven.
Accepting such a long-term deal risks paying more for your loan overall, if rates drop faster than the market expects and you get stuck at a higher rate.
But there is often flexibility in the products. Most allow you to transfer your mortgage – taking it with you on the same terms if you move before the end of the loan.
But if your circumstances change and you want to withdraw from the loan, most will have onerous prepayment charges, making it expensive.
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