Britain’s “big six” banks have made a significant move by cutting their mortgage rates to below 5 percent. This change comes after a period of inflation decline, which is good news for potential homebuyers and those looking to refinance their homes. Barclays, a major player in the banking sector, has announced a reduction in its home loan rates by up to 0.3 percentage points. From Friday, they’ll be offering a two-year fixed rate loan at 4.8 percent for those with a 40 percent deposit, a drop from the previous 5.1 percent.
Other Banks Following Suit
Barclays isn’t alone in this. Halifax and HSBC have also slashed rates across their residential and buy-to-let mortgages by 0.35 points. Nationwide, NatWest, and TSB made similar cuts last week. This trend suggests a more competitive and borrower-friendly market is emerging.
The Reason Behind Rate Reductions
Inflation and Interest Rates
The key driver behind these rate cuts is the fall in inflation, which dipped to 4.6 percent in October. This decrease has fueled speculation that the Bank of England might maintain the base rate at its current level in the upcoming December meeting. The central interest rate currently stands at 5.25 percent.
Expert Predictions
Experts in the field are optimistic, predicting that some mortgage rates might even edge closer to 4 percent by year’s end. This is a significant shift from earlier this year when rates spiked due to high inflation, leading lenders like Natwest and Nationwide to raise their prices.
The Economic Outlook
Jack Meaning, Barclays UK’s chief economist, expressed that inflation softening signals we may have reached the peak of the interest rate cycle. He anticipates the Bank of England’s base rate to start falling from mid-next year, which is already being factored into the longer-term interest rates that influence mortgage rates.
What This Means for Homeowners and Buyers
Impact on Current Homeowners
About 2.5 million homeowners are set to reach the end of their fixed-rate mortgage deals in 2023 and 2024. Many will face the challenge of refinancing at rates significantly higher than they’re accustomed to. Although the average rates for two-year and five-year fixed deals have decreased from nearly 7 percent in July to 6.19 percent and 5.79 percent respectively, they’re still higher than the sub-3 percent rates seen in 2021.
Future Expectations
The two-year and five-year swap rates, which are a reflection of the market’s expectations of future Bank of England rates, have also decreased. This drop indicates that further rate reductions could be on the horizon. Lenders usually set their home loan rates above these swap rates to ensure a profit margin, but some are now ready to cut their margins to boost their lending in 2023.
Lenders’ Strategy in a Sluggish Market
In a slower housing market, lenders are striving to meet their targets by potentially reducing margins on mortgage loans. Simon Gammon from Knight Frank notes that lenders are extremely keen to lend, sometimes even at minimal profit margins. Nicholas Mendes from John Charcol suggests that we may see rate changes continue for the next few weeks before stabilizing in the new year.