Mortgage market ‘heating up’ but homeowners still face ‘painful’ cost increase despite falling rates

The average rate on a two-year fixed mortgage deal has fallen from 5.92 per cent to 5.87 per cent

Britain’s mortgage market is “heating up” but some homeowners still face a painful rise in their monthly costs when deals expire this year, experts have said

Moneyfacts, the financial information service, said the average cost of a two-year deal had fallen from 5.92 per cent to 5.87 per cent – the lowest level for nearly seven years.

It comes following optimism in the City that the Bank of England will start cutting interest rates in the spring as inflation continues to fall.

In December, inflation eased back to its lowest level for more than two years, with falling petrol prices helping drive a bigger-than-expected drop. The Office for National Statistics said the rate of Consumer Prices Index inflation fell to 3.9 per cent in November, down from 4.6 per cent in October, and the lowest level since September 2021.

Most economists had been expecting inflation to fall to 4.3 per cent.

Despite the improving economic outlook the Bank of England, which was criticised in some quarters for not tackling runaway inflation more quickly, voted to hold interest rates at a 15-year high of 5.25 per cent for a third time in a row. The Bank’s monetary policy committee is scheduled to meet again on 1 February to make another decision on interest rates.

City analysts expect the Bank to start slashing rates in the spring, with some economists predicting they could fall as low as 3 per cent by the end of 2024, driving optimism in the market.

But while mortgage rates have started to come down they remain much higher than people have been used to in recent years, with more than a million homeowners set for a rise in their monthly payments when deals expire this year.

“The mortgage market may be heating up, but this won’t fully ease the pain for the roughly 1.6 million existing borrowers with cheap fixed rate deals expiring this year,”  Alice Haine, personal finance analyst from Bestinvest, explained.

City analysts expect the Bank to start slashing rates in the spring (PA)

“They still face a heavy jump in interest payments when they switch onto a new product, with the only comfort that the situation could have been much worse,” she added.

Lenders have priced in that the Bank will start cutting interest rates this year and have been reducing their prices for months ahead of an expected price war as the economic outlook improves further this year.

Workers have also recently been boosted by the government’s decision to cut national insurance contributions after the tax burden rose to its highest level in decades.

First Direct has announced rate cuts across its fixed-rate repayment mortgage range, with deals below 4 per cent set to be available from Friday. The announcement was made following rate cuts from other lenders this week, including HSBC UK and Halifax.

HSBC’s new rates were effective from Thursday and included a five-year rate of 3.94 per cent for remortgage customers borrowing up to 60 per cent of the property value.

Halifax kickstarted 2024 by cutting its fixed mortgage rates by nearly 1 per cent on Tuesday.

Slashing its rates across its two-year, five-year and 10-year fixed deals by up to 0.83 per cent, the building society also cut rates by up to 0.92 per cent for its existing customers.

As part of its revamp, First Direct is launching two products at 3.99 per cent from Friday.

Bank of England is expected to cut interest rates in the spring (iStock)

They include a 10-year fixed mortgage for people with a 40 per cent deposit, with a rate of 3.99 per cent, reduced by 0.98 percentage points from 4.97 per cent previously.

Also for people with a 40 per cent deposit, First Direct will offer a five-year fixed mortgage priced at 3.99 per cent – a rate which is being reduced by 0.65 percentage points.

The rates will be available to new and existing customers.

Among its two and three-year fixed rates, First Direct said fixed standard mortgages for people with at least a 15 per cent deposit will be priced at under 5 per cent, with the range beginning at 4.54 per cent for new customers and 4.49 per cent for switchers.

For people with a 10 per cent deposit, deals will start at 4.69 per cent on First Direct’s five-year fixed standard mortgage.

Analysts expected rates to fall further later in the year. Polly Gilbert, chief marketing officer at Tembo Money, said that a mortgage price war was “likely” on the horizon as inflation and interest rates fell.

“How good to see interest rates finally moving in the right direction,” she told Sky News. “We’re seeing some frenzy beginning to build, it’s positive this time.”

Separate figures published by the Bank on Thursday showed that mortgage approvals in the UK picked up in November, while credit card borrowing doubled to £1bn.

Mortgage approvals for house purchases – an indicator of future borrowing – rose to 50,100 in November from 47,900 in October, while approvals of remortgaging increased to 27,000 from 24,000.

Although approvals rose to their highest level since June, they remained below the long-term average.