Decline in UK Mortgage Rates Spurs Optimism for Homebuyers and Remortgagors

The average cost of a two-year fixed-rate mortgage in the UK has fallen below 6 per cent for the first time in almost six months, figures showed on Friday.

In news that will be welcome to homebuyers and remortgage buyers, data from Moneyfacts showed that the cost of borrowing is still falling from the peaks reached in the summer.

In July, the average cost of a two-year fixed-rate deal went up to 6.86 per cent but on Friday it had fallen to 5.99 per cent.

The average cost of a five-year fixed rate has also continued to fall, and stands at 5.6 per cent, according to Moneyfacts.

While the average reported by Moneyfacts shows the trend, would-be homebuyers and remortgage buyers can get much better deals than that headline rate.

Competition has been increasing and this week some of the UK's biggest lenders announced a new flurry of price cuts.

Nationwide Building Society reduced rates by up to 0.31 percentage points and is offering movers with a 40 per cent deposit a two-year deal fixed at 4.65 per cent, with a five-year fix at 4.29 per cent.

At Santander, rates have been cut by up to 0.32 percentage points. A first-time buyer with a 10 per cent deposit can now fix at 5.64 per cent for two years, while a five-year fixed rate for borrowers with a 40 per cent deposit is down to 4.39 per cent.

Mortgage rates have had a rollercoaster ride since Kwasi Kwarteng's mini-budget of September 2022. Panic in the money markets led to an immediate rise in mortgage costs, then after a few months last winter when rates settled back, stubborn inflation prompted the Bank of England to increase rates more rapidly than many had anticipated.

When the Bank meets next week, however, it is expected to hold rates at 5.25 per cent for the third time running, and economists have suggested that the next move will be downwards.

High mortgage rates have caused problems for borrowers coming to the end of fixed-rate deals, and have slowed down the housing market.

Sarah Coles, the head of personal finance at the financial firm Hargreaves Lansdown, said the move below 6 per cent was "psychologically important" and could help bring homebuyers back.

"It would be balm for the agony suffered by sellers over the past few months, as their properties sit unseen on the market and their for sale signs collect grime. However, we can't expect to see the impact in house price figures until the spring," she said.

James Hyde, a spokesperson at Moneyfactscompare.co.uk, said although lenders were offering cheaper deals, "it remains to be seen if the recent rate reductions will continue, as any further rises in inflation, base rate, or swap rates may lead to a reversal".

The United Kingdom's housing market experienced a significant shift as the average cost of a two-year fixed-rate mortgage dropped below six per cent for the first time in nearly half a year, according to recent data released on Friday.

This news, indicating a continued decline in borrowing expenses from the peak seen in the summer, brings a sense of relief to prospective homebuyers and individuals seeking to remortgage their properties.

Moneyfacts, a financial data provider, revealed that in July, the average cost of a two-year fixed-rate mortgage had surged to 6.86 per cent. However, as of the latest figures, this rate has plummeted to 5.99 per cent. Moreover, the average cost of a five-year fixed-rate mortgage has also followed suit, currently standing at 5.6 per cent.

While these averages showcase a positive trend, potential homebuyers and those looking to remortgage can secure even more favourable deals than the reported headline rates. A surge in competition among lenders has led to a recent wave of price cuts, with major financial institutions in the UK announcing enticing offers.

For instance, Nationwide Building Society has slashed rates by up to 0.31 percentage points, presenting a two-year fixed-rate deal at 4.65 per cent for movers with a 40 per cent deposit and a five-year fixed-rate option at 4.29 per cent.

Similarly, Santander has made significant rate cuts of up to 0.32 percentage points, offering a two-year fixed rate of 5.64 per cent for first-time buyers with a 10 per cent deposit, while a five-year fixed rate for borrowers with a 40 per cent deposit is now available at 4.39 per cent.

The fluctuating landscape of mortgage rates can be traced back to the aftermath of Kwasi Kwarteng's mini-budget in September 2022. A surge in market panic resulted in an immediate escalation of mortgage costs. Following a temporary stabilisation last winter, persistent inflation pressures prompted the Bank of England to accelerate rate increases more rapidly than anticipated.

However, in the upcoming meeting, the Bank is anticipated to maintain rates at 5.25 per cent for the third consecutive time. Economists speculate that the next move could potentially be a downward adjustment in rates. High mortgage rates have significantly impacted borrowers nearing the end of fixed-rate deals and have also contributed to a slowdown in the housing market's pace.

Sarah Coles, Head of Personal Finance at Hargreaves Lansdown, highlighted the psychological significance of this drop below six per cent. She anticipates this change could potentially rejuvenate interest among homebuyers, offering respite to sellers who have experienced prolonged periods with properties remaining unseen on the market.

Coles, however, cautioned against expecting immediate effects on house price figures, suggesting that the impact might become evident around the spring season.

James Hyde, spokesperson at Moneyfactscompare.co.uk, expressed cautious optimism regarding the ongoing rate reductions offered by lenders. He highlighted the uncertainties, stating that future fluctuations in inflation, base rates or swap rates could potentially reverse these recent rate cuts.

Amidst these changes, recent data from a leading index indicated a second consecutive monthly increase in UK house prices in November. The slight alleviation in mortgage rates appeared to attract more buyers into the market, resulting in an average price rise of £1,394 or 0.5 per cent to £283,615, as reported by the mortgage lender Halifax.

This surge in activity signifies a positive shift in the housing market, which had experienced stagnant price growth over the past year due to increased interest rates and subsequent affordability challenges that deterred potential buyers.