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Modest cuts to fixed mortgage interest rates are likely over the coming weeks, brokers and housing market analysts said, following positive inflation data and upbeat expectations from the Bank of England.
Simon Gammon, managing partner at property broker Knight Frank Finance, said the combination of lower-than-expected inflation figures and the Bank of England's decision to keep interest rates steady – amid upbeat comments from the bank – had added “stability” to the mortgage market.
“One of the major lenders [NatWest] Their rates fell [on Wednesday] We expect to see more of that over the next two weeks. Any cuts will be fairly marginal, he said, but it increasingly looks like borrowers won't have to wait long before mortgage interest rates start to fall more clearly.
Mortgage interest rates have been rising since mid-February, as swap rates – which lenders use to price their fixed-rate deals – have been gradually increasing. But in the last week or so interest rates have started to fall, and have continued to fall in the wake of the Bank of England's decision.
“The movement we've seen in government bond yields and swap rates over the last week or so will give lenders room to cut interest rates,” said Ray Bolger, senior technical director at brokerage John Charcol. “We'll see some rates start to fall.”
The risk to lenders that the Bank of England will take longer than expected to cut key interest rates this week has eased, according to Lucian Cook, director of residential research at property firm Savills. “This certainly means more stability in the mortgage market and potentially lower interest rates, which will add some strength to the housing market in terms of a continued recovery.”
Although the mortgage outlook was optimistic, he warned that it would not lead to significant changes in the continuing affordability barriers facing borrowers. Affordability is assessed using rates linked to the Bank of England's base rate, which has not yet fallen.
“She doesn’t turn the puck a lot,” Cook said. “What it does is give those people who can get mortgage financing more confidence to be able to do so. To see the range of buyers open up more, you'll need to see the first [base] Lower interest rates and then a more pronounced improvement in mortgage rates.
With inflation falling – to 3.4 per cent annually in February – the argument over whether borrowers would take a two-year or five-year fix has moved in favor of a shorter-term deal in anticipation that interest rates will fall further.
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Buyers with a lot of equity – borrowing no more than 60 per cent of the property's value – can get a two-year fix with Barclays at 4.53 per cent. A five-year fix is available from Nationwide at 4.19 per cent.
The first signs of borrowers' response will likely appear in mortgage approvals. These have already been on an upward trajectory, with mortgage approvals reaching 55,000 in January, up from 44,000 in September 2023. There is also evidence of house price growth, with the Nationwide Index for February recording prices rising 1.2 per cent over the year . .
Expectations that the Bank of England will cut interest rates this year are pushing borrowers towards short-term fixes, so they can fix again at lower rates later this year or next, brokers said. Recently, the gap between two-year and five-year interest rates has narrowed, reducing the monthly savings that can be achieved by choosing the longer-term, cheaper fix.
Adrian Anderson, director of brokerage Anderson Harris, said the two-year reforms would allow more flexibility over the coming months. Prices on two-year deals are much lower than tracker prices. Five-year interest rates are marginally lower, though not “significantly,” he said. “That's why most people choose two-year fixes.”
