Last week, the UK’s largest building company, Nationwide, launched a five-year fixed mortgage at an interest rate below 4%, and more lenders are expected to follow suit in the coming days. With any luck, this could be the start of a wave of interest rate cuts.
Eight out of 10 economists polled by Reuters expect the Bank of England’s interest rate-setting Monetary Policy Committee to cut its key interest rate from 5.25% today to 5% on Thursday.
But it’s not over yet.
Although consumer price inflation has fallen to the Bank of England’s 2% target, core inflation was relatively high at 3.5% in June, with services inflation holding steady at 5.7%.
So the MPC may postpone it until September, but in any case the banks and builders will not delay making this decision. They ignore today’s cheaper borrowing costs.
Mortgage rates rose by more than 6% in the autumn of 2022, adding £500 to the average monthly bill, after Conservative Prime Minister Liz Truss’s mini-budget unleashed financial chaos.
The news that Nationwide has launched a five-year fixed-rate loan repayment program at just 3.99% is good news. Unfortunately, this program is not available to everyone.
This offer is only available on loans with a maximum loan-to-value ratio of 60%. It is limited to property purchases and is not available to people looking to remortgage for a cheaper deal. The arrangement fee for the deal is £1,499.
Nationwide’s new five-year plan to fix a 75% loan-to-value ratio costs more at 4.43%, although it includes a lower fee of £999.
Rachel Springall, finance expert at Moneyfactscompare.co.uk, said fixed mortgage rates were on a downward trend and other lenders should now follow Nationwide’s lead. “Usually, a brand with a strong presence in reducing rates can encourage other lenders to review their rates to remain competitive.”
All the major banks, including Halifax, Lloyds, Barclays and NatWest, will review their rates, and Springall said: “There is a lot of room for improvement.”
Nicolas Mendez of Charcol Real Estate Brokerage expects good news for homeowners who need to remortgage. “I expect the biggest future cuts to be in remortgage rates, as they still have more room to fall.”
However, buyers and homeowners face a difficult decision.
Some may want to take advantage of today’s lower mortgage rates, while others may prefer to wait in case the Bank of England cuts interest rates twice this year, sending rates lower still.
Lenders have already priced in a first all-important rate cut from the Bank of England, whether it comes in August or September, said Ben Thompson, deputy chief executive of Mortgage Advice Bureau.
So he believes there is no point in waiting. “Now is the time to prepare for a mortgage, talk to a broker, and see what your options are.”
It also takes several months to get a mortgage, and lenders may pass on interest rate cuts during that time.
Mortgage finance is still expensive for first-time buyers and those with smaller deposits.
Last week, Skipton Building Society launched its new range for first-time buyers which includes a five-year fixed rate of 5.89% for loans up to 95% loan-to-value, which is significantly higher than lower loan-to-value rates.
On the other hand, there are no fees, and Skipton even gives buyers £1,500 cashback. Without cashback, the headline rate is lower at 5.69%.
Unusually, two-year fixed-rate mortgages now charge lower interest rates than five-year mortgages, as lenders anticipate lower borrowing costs in the future.
This makes the mortgage decision a little more difficult and people should seek advice from a broker before taking the next step.
While everyone is waiting for the MPC’s interest rate decision on Thursday, banks and builders have already made their decisions. Borrowers may also want to prepare.