Average mortgage rates have fallen for the first time in two months in a sign of better things to come for homeowners.
The average two-year fix fell from 6.81 per cent to 6.79 per cent on Thursday, and the average five-year fix from 6.33 per cent to 6.31 per cent, according to the financial data analyst Moneyfacts.
It is the first daily fall in mortgage rates since May 26. It remains to be seen if this is a blip or the start of better times for homeowners.
It follows better-than-expected inflation data on Wednesday that showed a fall in the rate of rising prices, from 8.7 per cent in May to 7.9 per cent in June — in the first piece of good economic news for the government in months. The Office for National Statistics said there was also a drop in the rate of core inflation, which strips out food and energy prices, from 7.1 per cent to 6.9 per cent.
The data led to hopes that the Bank of England base rate, which stands at 5 per cent, will not to have to increase much further.
Elliott Culley, director at the mortgage broker Switch Mortgage Finance, said: “There is certainly some cautious optimism in the mortgage market. There has been little movement from lenders yet as they will want to see more positive trends before rates start reducing.
“We may still see an increase in the base rate, but it will be what Andrew Bailey and the rest of the Bank’s Monetary Policy Committee say afterwards that’ll be important. If they confirm they may not need to raise rates as high or for as long we could see a significant reduction in mortgage rates.”
The underlying swap rates, expectations of future Bank rates, which determine the price of fixed-rate mortgages, have fallen rapidly since the inflation news.
The two-year swap rate fell from 5.93 per cent on Monday to 5.46 per cent on Wednesday morning. They fell again slightly on Thursday, to 5.45 per cent. This has prompted hopes mortgage rates could soon follow.
David Morris, chief commercial officer at Yorkshire Building Society, told The Times on Wednesday: “There’s a few weeks’ lag between the underlying funding rate and what mortgage rates do, but I think you will see that flow into pricing over the next two to three weeks, as it’s in lenders’ interests to offer cheaper rates.”
Rishi Sunak, the prime minister, said the inflation figures showed that the government had the right approach and insisted that he was going to “stick to the course”. He said: “I know things are difficult for people right now but today’s figures should give people some comfort that the plan is working.”
Jeremy Hunt, the chancellor, said the government was not complacent but suggested that he expected to meet Sunak’s target of halving inflation by the end of the year.
Mortgage rates had risen rapidly since May after consecutive annual inflation figures were worse than expected. From May 1 to last Friday the average two-year fix rose from 5.26 per cent to a 15-year high of 6.78 per cent.
The pace of rate rises slowed this week, with average mortgage rates unchanged between Friday and Tuesday, according to the financial data analyst Moneyfacts. The average two-year fixed rate rose to 6.81 per cent on Wednesday and banks including NatWest and Virgin Money said they would increase rates.
However, Chris Sykes, of the mortgage broker Private Finance, said: “Wednesday’s news will give lenders more breathing room to maintain fixed rates and even look at rate reductions sooner than expected if this direction of travel continues.”
The EY Item Club, the economic forecaster, now expects a 0.25 percentage point rise in the Bank rate next month with a potential final increase in September, before the cycle of rate rises that started in December 2021 comes to a halt.
Martin Beck, its chief economic adviser, said: “The direction of travel is now looking more favourable, following a period when UK inflation appeared to be very sticky.”
• When a two-year fixed mortgage is your best option
Financial markets reacted positively to the inflation news, and there was a sharp drop in swap rates — the expectations of the future Bank rate that are used to price fixed-rate mortgages.
Morris said: “I think what you will see is lenders looking to take this opportunity to offer some really good rates. I’d certainly expect to see cheaper rates and I think competition in the market will be a big reason for that.”
The banking trade body UK Finance said more homeowners were betting mortgage rates were close to their peak and taking out more expensive two-year deals in the hope rates will have fallen by the time they remortgage.
Two-year fixed-rate deals were the only type to increase in popularity between April and May, it said, accounting for 34 per cent of new mortgages, up from 30 per cent. The percentage of loans taken out on five-year fixed-rate deals fell for the sixth consecutive month to 48 per cent, down from 66 per cent in November.
