Two-year fixed mortgage rates are falling faster than longer-term deals as markets price in expectations for interest rate cuts from the Bank of England, making short-dated mortgage deals increasingly competitive.
Santander this week became the first major lender to offer a two-year deal of less than 4 per cent, lowering its rate for home buyers with a 40 per cent deposit from 4.28 per cent to 3.99 per cent.
Five-year rates have been cheaper than two-year rates since September 2022, according to data provider Moneyfacts, when Liz Truss’s disastrous “mini” Budget shook the market and spiked borrowing costs — which sent the UK property market into a protracted slump.
But the gap has narrowed to the smallest level in at least a year as market expectations for the pace of interest rate cuts move the swap rates on which mortgage costs are based.
Nicholas Mendes, mortgage technical manager at broker John Charcol, said: “The gap between two-year and five-year fixed mortgage rates is expected to narrow. By the end of 2024, five-year rates could drop to around 3.5 per cent, while two-year rates are expected to be around 3.8 per cent.”
Mortgage pricing tracks interest rate swaps, which reflect the average interest rate expected over a given term. Two-year rates have come down more quickly than five-year ones because short-dated interest rate swaps have fallen by more than their longer-dated peers as the Bank of England has started on its path of lowering interest rates from a 16-year high. Markets now expect the BoE’s rate cutting cycle to be complete within two years.
Lenders have picked up the pace of rate reductions as they respond to changing market pricing and compete for new business — with HSBC, Nationwide, TSB, NatWest and Virgin Money all cutting rates in the past week.
The average two-year rate has fallen from 5.64 per cent a month ago to 5.47 per cent, according to Moneyfacts. Rates for those buying a home, especially with a large deposit, are generally cheaper than those for people remortgaging because lenders are focused on attracting new business.
The BoE on Thursday held interest rates at 5 per cent — as economists had expected — after rate setters delivered their first rate cut for more than four years last month. The US Federal Reserve on Wednesday announced a jumbo half-point rate cut. And investors expect UK interest rates will continue to fall to 4 per cent by March next year.
Five-year deals have been more popular with borrowers over the past two years, in large part thanks to lower pricing. Aaron Strutt, director at broker Trinity Financial, said the first two-year deal below 4 per cent was “good news because many borrowers do not want to lock in to a longer-term fix”.
He said more lenders will be likely to offer sub-4 per cent deals “over the next few weeks”. But he added that even with cheaper short-term deals “some people are concerned about potential future shocks to the economy, so they would rather have long-term payment security”.
This article was written by Mary McDougall and Joshua Oliver from The Financial Times and was legally licensed through the DiveMarketplace by Industry Dive. Please direct all licensing questions to legal@industrydive.com.