Five-year fixed mortgages have gone below the 4 per cent interest barrier for the first time since rates shot up last Autumn following a new product launch by HSBC.
The bank’s latest five-year fixed rate mortgage has an interest rate of 3.99 per cent, and it has also launched a two-year fixed deal at a competitive rate of 4.44 per cent.
Previously the only rate on the market below 4 per cent was Virgin Money’s 10-year fixed deal, launched earlier this month.
Since the start of the year, mortgage brokers have been anticipating a mortgage price war as lenders push down their prices in order to drum up new business.
They want to make up for a lull in activity at the end of 2022, when the economic chaos in the wake of the September mini-Budget saw average mortgage rates spike as high as 6.5 per cent, and many borrowers held off on making decisions.
Mortgage rates are now falling despite the Bank of England continuing to hike its base rate.
It rose to 4 per cent earlier this month, the highest level in 14 years, and is expected to peak at 4.25 or 4.5 per cent later in the year.
Borrowers can check the rates they could get based on home value and loan size with our best mortgage rates calculator.
Why are mortgage rates falling?
Most lenders rely on swap rates to price their mortgage products.
Swap rates are an agreement in which two banks agree to exchange a stream of future fixed interest payments for another stream of variable ones, based on a set price. They tend to show where the markets think mortgage rates are headed in the longer term.
Five-year mortgage swap rates are currently at around 3.5 per cent, suggesting that this is where banks believe interest rates will be in five years’ time.
Nicholas Mendes, mortgages technical manager at John Charcol said: ‘With swap rates hovering at 3.5 per cent on a five-year fix, there is a clear indication that base rate and the economic outlook look far more positive than recent times.
‘The markets clearly feel that base rate will be on a downward projection from the end of this year. This will mean mortgage rate competition will be in full swing. HSBC are the first to “break the camel’s back” and am sure we will see other lender follow in the next few weeks.
How low will mortgage rates go?
‘We could see five-year fixed rates as low as 3.5 per cent in the not-too-distant future, but how far the they go will be another question,’ Mendes continues.
HSBC is the latest major lender to drop its rates. Since the start of the year Halifax, Santander and Barclays have all slashed the prices on their fixed rate loans.
The rapid rise of interest rates following the Autumn mini-Budget saw the average for both two and five-year fixed rates soar to over 6.5 per cent in October.
These averages have now fallen to 5.42 per cent and 5.14 per cent respectively, according to Moneyfacts – though cheaper deals are available, especially for those with larger deposits.
However, less than two years ago, mortgages were widely available with rates lower than 2 per cent – and some with rates even lower than 1 per cent.
It means that those coming off existing fixed rates and needing to remortgage may still face paying more each month than they are used to.
According to research from The Mortgage Lender in late 2022, more than half of mortgage borrowers were on a deal ending in the next two years.
David Hollingworth, associate director at mortgage broker L&C said: ‘Although those coming to the end of a fixed rate taken during the low in rates of recent years will still be faced with higher payments than they have been used to, it’s a far cry from the prospect of rates at 6 per cent or more.
‘These deals are beginning to offer rates that many may have feared were headed for extinction.
‘Those borrowers that understandably decided to sit on their hands when rates went through the roof last October, should now seriously consider if it’s time to take advantage of these significant improvements.’
What to do if you need a mortgage
Borrowers who need to find a mortgage because their current fixed rate deal is coming to an end, or because they have agreed a house purchase, should explore their options as soon as possible.
This is Money’s best mortgage rates calculator powered by L&C can show you deals that match your mortgage and property value
What if I need to remortgage?
Borrowers should compare rates and speak to a mortgage broker and be prepared to act to secure a rate.
Anyone with a fixed rate deal ending within the next six to nine months, should look into how much it would cost them to remortgage now – and consider locking into a new deal.
Most mortgage deals allow fees to be added the loan and they are then only charged when it is taken out. By doing this, borrowers can secure a rate without paying expensive arrangement fees.
What if I am buying a home?
Those with home purchases agreed should also aim to secure rates as soon as possible, so they know exactly what their monthly payments will be.
Home buyers should beware overstretching themselves and be prepared for the possibility that house prices may fall from their current high levels, due to higher mortgage rates limiting people’s borrowing ability.
How to compare mortgage costs
The best way to compare mortgage costs and find the right deal for you is to speak to a good broker.
You can use our best mortgage rates calculator to show deals matching your home value, mortgage size, term and fixed rate needs.
Be aware that rates can change quickly, however, and so the advice is that if you need a mortgage to compare rates and then speak to a broker as soon as possible, so they can help you find the right mortgage for you.