Fixed mortgage rates are falling, and ‘could be back at 4% next year’

When the Bank of England’s Monetary Policy Committee raised its base rate by 0.75 per cent to 3 per cent earlier this month the reaction was muted.

Some expected mortgage rates to rise in the wake of the decision, as they have each of the eight times the Bank has increased the base rate since December 2021.  

But while tracker mortgage rates have increased with the rate rise, fixed rates are continuing to fall from the highs they reached following September’s ill-fated mini-Budget. 

Lenders including Platform, Yorkshire Building Society, HSBC, Halifax, Lloyds and NatWest have all reduced their fixed rates in the last week. 

The average two-year fix, which peaked at 6.65 per cent on 20 October, according to Moneyfacts, now sits at 6.28 per cent (14 November) while the five-year fix, which peaked at 6.51 per cent, now sits at 5.07 per cent. 

It is partly because gilt yields, that dictate the cost of Government borrowing and impact mortgage rates, have fallen back to pre-mini-Budget levels.

Furthermore, market predictions for how high interest rates will go next year have come down significantly with most expecting the base rate to peak at 4.5 per cent, 1.5 per cent lower than forecast in the wake of the September’s ill-fated mini-Budget.

Some mortgage brokers are therefore predicting that five-year fixed mortgage rates will fall back to below 4 per cent in the New Year.

Mark Harris, chief executive of mortgage broker SPF Private Clients, says: ‘Fixed-rate mortgage pricing has been edging down over the past few weeks and if this continues, we would expect five-year fixes below 4 per cent by early 2023.

‘With lenders reporting that volume and activity is falling away thanks to higher rates, it is a trend we expect to continue. 

‘That desire for pipeline and the falling cost of funds will incentivise lenders to reduce rates further, which will be welcome news for hard-pressed borrowers.’

Where are rates now? 

Following the September mini-Budget presented by then-chancellor Kwasi Kwarteng gilt yields shot up, pushing up the cost of borrowing for banks. 

In response lenders hiked up their own mortgage rates, ensuring they weren’t caught short by the steep increase in the cost of credit by passing it on to their customers.

Before the mini-Budget on Friday 23 September the average two-year fixed rate across all loan-to-value brackets was 4.74 per cent and the five-year fix was 4.75 per cent, according to Moneyfacts.

The rates now stand at 6.28 per cent and 6.07 per cent respectively, having both fallen since the base rate announcement on 3 November.

The consensus is that fixed rates are falling, despite the Bank of England increase, because lenders had already priced in future rises.

Chris Skyes, technical director at mortgage brokers Private Finance, said: ‘We hope this direction of fixed rate pricing will put some borrower’s minds at ease, as this activity from lenders suggests that a certain level of base rate increase has already been factored into the pricing of fixed mortgage rates.’

Where are mortgage rates now?

The average two-year fixed rate deal is now 6.28 per cent, according to Moneyfacts. 

On a £200,000 mortgage it means the monthly payments would be £1,323, down £49 from the 1 November when the rate was 6.47 per cent.

There has been a similar trend on five-year fixed rate deals. The average rate has fallen 0.25 per cent since the start of the month to 6.07 per cent, saving £31 a month on a £200,000 mortgage.

This month, Platform, the mortgage arm of The Co-operative Bank, has released new mortgage rates taking several of its five year fixes rates below 5 per cent.

And it is not the only one lowering rates. Yorkshire Building Society has cut its rates by up to 0.38 per cent, with its cheapest now 5.34 per cent on a two-year fixed deal. 

HSBC has cut its rates by up to 0.29 per cent, citing the reduced cost of borrowing as the reason behind the decision.

Virgin Money has also brought its rates down. The most significant cut has been to its five-year fixed rate with a 15 per cent deposit, which has been slashed by 0.34 per cent to 5.29 per cent.

Currently the best home purchase deal on the market is a five-year fixed rate at 5.19 per cent, according to the latest Defaqto data. For low deposit mortgages, the best offer has dropped notably in the last few days.

On 9 November the best two-year fixed deal on a  5 per cent deposit was 6.24 per cent, by 11 November it fell to 5.99 per cent.

On a £200,000 mortgage the rate reduction cuts the monthly payment from £1,318 to £1,287 saving £31 a month.

If borrowers are prepared to take a longer term fix in order to secure a lower rate, First Direct is offering a 10-year fixed rate mortgage at 75 per cent loan-to-value for 5.04 per cent.

However, despite rates coming down lenders are reevaluating their affordability calculations, as inflation remains in double digits at 10.1 per cent in September.

As the cost of living increases, they may decide to put stricter limits on the income they require from borrowers to make sure they can afford their repayments.  

You can check best buy tables and the best mortgage rates for your circumstances with our mortgage finder powered by London & Country – and figure out what you’ll actually be paying by using our new and improved mortgage calculator.

Where will rates go next? 

Swap rates – the contract by which lenders ‘swap’ payments on fixed interest rates with variable ones to offset the risk of a fixed rate – have fallen in recent weeks, indicating that lenders have tempered their view on higher interest rates in future. 

Gilt yields, which impact the cost of mortgage lending, have also fallen – but mortgage rates aren’t falling as quickly.

Added to this there is still a significant amount of uncertainty in the market. This includes the Chancellor’s autumn fiscal statement on 17 November and the likelihood of another Bank of England rate rise when the Monetary Policy committee next meets on 15 December.

However, there is an emerging view that, for now at least, mortgage rates will continue to fall. 

In his press conference after the base rate announcement Bank of England Governor Andrew Bailey said that the next rate raise was likely to be as high as the market had already priced in, adding ‘That is important because, for instance, it means that the rates on new fixed-term mortgages should not need to rise as they have done.’

Justin Moy, managing director at broker EHF Mortgages, said: ‘As the money markets have improved over the last few weeks, this has meant the cost of money has also reduced, and those savings are now being passed back to the mortgage holders.

‘There will be further changes by other High Street lenders, but we expect the market to settle, rates to stabilise over the next few months, and, in a “near-cartel” fashion, most lenders will have similar products so that no one lender takes too many applications.’

Craig Fish, founder and director at Lodestone Mortgages & Protection, says that while rates have begun to come down the pace of change is ‘slower than brokers would like.’

He said: ‘As expected, lenders have started reducing their rates, and I strongly suspect that they will continue to do so, as we start to see the beginnings of a rate war between lenders.

‘Lenders often vary rates to manage workloads, so whilst this may be partly the reason, it could also be that many lenders have almost hit year end lending targets and so aren’t looking to take in much more business. I would expect to see a very positive start to next year.’