Mortgage rates on two-year deals have fallen, in a sign that recent rate chaos may be easing.
The cost of two-year mortgages has dropped below what lenders are offering on five-year deals for the first time since Liz Truss’s ill-fated mini-budget just under three years ago.
The Bank of England on Thursday cut the base interest rate 0.25 percentage points to 4 per cent.
Andrew Bailey, the governor of the Bank of England, said interest rates should not be cut too quickly
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Rachel Springall from the data company Moneyfacts said: “The end of the inversion in the two and five-year fixed rates, if sustained, will bring borrowers back to a more traditional mortgage market, where it’s more expensive to secure a longer-term fixed mortgage.”
Analysis by Moneyfacts revealed that the average two-year mortgage has dropped to 5 per cent. It meant that for the first time since September 2022, the month that Kwasi Kwarteng’s budget sent interest rates spiralling, the rate was lower than the average five-year fixed price, which was recorded at 5.1 per cent as of Thursday morning.
Banks had widely expected a cut and have been pricing in changes in recent months, offering rates well below 4 per cent on many two and five-year fixed-rate mortgages. The average mortgage rate is now 5.04 per cent, which is 0.51 percentage points lower than a year ago and 1.48 percentage points lower than the 6.52 per cent average two years ago.
David Hollingworth from the mortgage broker L&C said: “The two-year rates are much lower than five years now, with a variety of lenders offering well below 3.8 per cent. But with the five years you are tending to see them a lot closer to the 4 per cent mark.
The fall in the base rate was good news for homeowners but it was less positive for savers
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“It’s all encouraging in terms of where mortgage rates have been heading, but borrowers should still think about what might work best for them in the longer run in terms of how long to fix, rather than just heading for the lowest rate.”
The rate change will be welcome for those on variable tracker deals, who will see an immediate drop in their monthly mortgage costs as their rate is directly linked to the base rate.
Adrian Anderson from the broker Anderson Harris said the rate cut was good news for all homebuyers and those looking to remortgage and he hoped to see further cuts in rates throughout the year. “It does feel like we are on the path to cheaper mortgage rates, where the costs are going to get cheaper, which will help with market confidence and affordability,” he said. “I guess the hope is that by the end of the year we could be getting closer to 3.5 per cent.”
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While the fall in the base rate was good news for homeowners, it was less positive for savers. The fall in the rate means many savings accounts and cash Isas on variable rates will be cutting rates in the coming weeks, while offers will be cut further than they have been in recent months.
According to Moneyfacts, the average easy-access cash Isa has fallen from 3.36 per cent in August 2024, when the base rate was at 5 per cent, to 2.9 per cent at the start of this month.
Springall said: “Savings rates are getting worse and any base-rate reductions will spell further misery for savers. It is essential that savers do not wait around for too long to snap up the top rates on the market, particularly if they use their pots to supplement their monthly income. Switching savings accounts must become a regular habit to ensure savers are not getting a paltry rate.”