Mortgage rates will return to 4% ‘in not-too-distant future’

Today (November 22), the average five-year fixed rate fell below 6 per cent for the first time in seven weeks, to 5.95 per cent, according to Moneyfacts.

Lenders have been cutting both their fixed and tracker mortgage rates.

With swap rates - a leading indicator for mortgage rates - trending down and a recent base rate rise which was smaller than anticipated, lenders have been able to revisit their product pricing.

There may be much more room for improvement.Rachel Springall, Moneyfacts

Since yesterday (November 21), the average five-year fixed rate has fallen 0.06 percentage points. Meanwhile, the average two-year fixed rate has fallen by an even greater 0.08 percentage points, from 6.21 to 6.13 per cent.

“It's great to see rates begin to trickle down, and hopefully this will be an ongoing trend with markets begging to settle,” said Derbyshire-based broker at Missing Element Mortgage Services, Paul Neal.

“Swap rates have been gradually dropping for the past six weeks. I think we can get back to 4 per cent in the not-too-distant future, which is still a decent rate. 

“The issue is we have been spoiled with incredibly low rates for so long that anything above 3 per cent seems high.”

Five-year swap rates have fallen around 0.8 percentage points over the past month to 3.8 per cent, while two-year swaps have fallen by a smaller 0.6 percentage points to 4.2 per cent. This time last year, these swap rates sat below 1 per cent.

Finance expert at Moneyfacts, Rachel Springall, said there “may be much more room for improvement”.

“After the fiscal announcement (September 23) the average two and five-year fixed mortgage rates rose sharply, but they are edging further away from their daily peak (October 20),” Springall explained.

“It is worth noting that rates could fall further still, but there is no clear answer as to how quickly that may be. 

“Indeed, it’s been around two months since both the average two and five-year fixed mortgage rate breached 5 per cent (September 30, 2022), but today only a handful of lenders are offering sub-5 per cent fixed deals.”

Today, Santander shaved off up to 1.25 per cent from its tracker rates and a further 0.45 per cent off its fixed rates.

Long term, or at least from 2024 onwards, I expect the Bank of England base rate to stabilise around 2 per cent and expect this to lead to fixed rates returning to between 3 and 4 per cent.James Myatt, Embrace Financial Services

The latest cuts put Santander’s cheapest tracker rate at 3.74 per cent, well below average fixed rates.

While fixed rates do not change for the number of years they are fixed for, tracker rates can change in line with the Bank of England’s base rate.

Brokers have said due to the base being unlikely to peak past 3 or 4 per cent, borrowers on variable or tracker rates could remain below those on fixed rates even when taking into account further base rate hikes.

Mortgage broker at Embrace Financial Services, James Myatt, said he expects fixed rate deals to continue to edge down slightly as 2022 draws to a close, as lenders look to hit end-of-year targets and service levels return to normality. 

“The majority of borrowers are leaning towards two-year products (either fixed rates or trackers) with the hope and expectation that the current spike in inflation and interest rates will last 12-18 months, after which they will be in a position to negotiate more favourable terms in 2024/25 when their deals are up,” Myatt explained.

“Long term, or at least from 2024 onwards, I expect the Bank of England base rate to stabilise around 2 per cent and expect this to lead to fixed rates returning to between 3 and 4 per cent.”

ruby.hinchliffe@ft.com