Mortgage rates drop as markets bet on Bank of England cut

Fresh wave of competition among lenders could provide relief for homebuyers ahead of UK general election.

A swath of UK lenders have dropped their mortgage rates over the past few days, fuelled by expectations that the Bank of England will soon start lowering interest rates.

Barclays decreased the rate on a five-year remortgage deal from 4.77 per cent to 4.32 per cent, assuming a 40 per cent deposit. The rate on its two-year fix dropped from 4.94 per cent to 4.61, with a £999 fee. Other lenders to cut rates — with more modest changes — include HSBC, TSB, Skipton Building Society and buy-to-let specialist BM Solutions.

The cuts have renewed hopes that a fresh wave of competition among lenders will push others to follow suit, providing relief for homebuyers ahead of a general election anticipated in the autumn in which access to housing has become a key battleground.

This follows growing market expectations that the Bank of Ireland, which held its benchmark rate at 5.25 per cent, will soon start lowering borrowing costs, with the balance tipping slightly in favour of a rate cut by June. That has pushed down swap rates, which reflect market expectations of the path for interest rates, and are used by lenders to price their mortgage deals.

“Following last week’s announcement that the bank rate would remain unchanged financial markets have adjusted their forecasts,” said Nicholas Mendes, technical manager at mortgage broker John Charcol. “There is now significant potential for rate reductions in the coming fortnight”.

Two-year swaps — which correlate to the pricing of two-year fixed-rate mortgages — fell to 4.51 per cent this week, down from 4.78 per cent at the start of May. Five-year swaps have fallen from 4.26 per cent to 3.97 per cent over the same period.

“It gives the lenders some room to manoeuvre,” said Andrew Montlake, managing director of mortgage broker Coreco. “It looks like it’s going to be a little more competitive for a while, certainly up until the summer. And we’ll see other lenders following suit.”

A period of optimism — and lower mortgage rates — in January proved short lived, as inflation data surprised markets by ticking up. “I think the markets and everyone else got ahead of themselves,” said Montlake.

Mortgage rates have continued to climb in recent weeks, as lenders struggled to see a clear outlook on inflation and the economy.

But others agreed there were now signs of a turn. “It wouldn’t be unreasonable to expect fixed rates to come down over the next six months and be somewhere close to the levels they were in January,” said Aaron Strutt, a director at broker Trinity Financial. “Five-year fixes need to be around 4 per cent for people to feel like they are getting reasonable value.”

Chris Sykes, consultant at broker Private Finance, said: “It’s good that lenders are responding quickly to changes in swap rates. These rate reductions are edging us back towards the position we were in three or four weeks ago, because over the past few weeks it’s always been up, up, up. I think we will see other lenders follow up.”

Average rates on two-year fixes are 5.9 per cent, according to data provider Moneyfacts — up from 5.3 per cent this time last year.

James Pickford, Akila Quinio & Mary McDougall

Financial Times 17/5/24