No more 2% deals, but New Year mortgage rates show promise

Since July 2023, UK mortgage rates have been steadily falling. They’ve now reached their lowest level since Liz Truss’s 2022 mini-budget.

During the first week of 2024, the downward trend in rates has escalated. We’ve seen eye-catching cuts in mortgage rates as lenders enter a price war to finally give borrowers some New Year cheer. But will the downward trend continue?

Why are rates dropping so fast now?

Competition between banks has further intensified due to the number of mortgage transactions contracting. They’re now fighting for new customers whilst also trying to keep hold of their existing homeowner clients.

The tool they’re using to attract/retain customers is lowered interest rates, and they’re going for it. This news will at least ease the pain (but not cure it) for homeowners coming off sub-2% two-year fixed deals this year.

Homeowners are quickly coming to realise that cheap money has long since left the building. Most will face heightened costs and (probably) have to readdress their budget. But we have a plan for you…

The 2024 sharp decline in interest rates: the story so far

Five of the UK’s largest mortgage lenders slashed rates by up to 1% to kick off 2024. This is distinctly different from last year.

At the beginning of 2023, many lenders were accused of profiteering from Bank of England (BoE) rate rises. Now, they’ve flipped 180° and seem intent on reducing their profit margins in order to fill their mortgage books.

Leading high street lender HSBC kicked off 2024 with a five-year fixed mortgage rate below 4%, the first since May 2023. They backed this up with the first sub-4.5% two-year deal since June 2023.

The decline in numbers (but don’t expect to see sub-2% again)

Only five months ago, the best two-year fix was around 6%. Things have come a long way since then.

True, today’s 4% isn’t the 2% many homeowners are paying at the moment. We won’t see sub-2% mortgages for a long time, if ever again in my lifetime.

But, seeing cheaper deals coming to market will bring welcome relief to the more than 1.6 million households whose fixed term deal expires this year. That’s a huge positive compared to this time last year.

The enablers: BoE base rate and market swap rates

The reason lenders feel confident in slashing their interest rates now is twofold.

First, speculation is rife that the BoE base rate has peaked at 5.25%. They’re optimistic that the base rate will come down earlier than expected* based on positive economic data, including a slowdown in inflation.

The other major factor enabling lenders to slash their rates is the downward trajectory of swap rates. Lower swap rates mean that lenders can raise cheaper funding in the wholesale markets. This, in turn, gives lenders the confidence to make chunkier cuts to their mortgage rates in the short term.

Today’s ‘best buy’ deals are considerably better than last year

The results are here already. Best Buy mortgage deals are all now cheaper than a year ago. Five-year fixed loans are dipping below 4%, whereas the best available rate at the start of 2023 was 4.39%.

*Analysts at the research firm Capital Economics now predict that the BoE base rate could start falling as early as June, rather than the previously-expected November. Furthermore, it could potentially drop to 3% in 2025. Reasons to be cheerful, indeed.

What should homeowners whose fixed-rate deal expires in 2024 do next?

If you took out a two-year fixed deal two years ago, the likelihood is you’ll be paying double the interest rate for a remortgage now. So, you could take the cautious approach: do your research, and/or get a broker to do it for you.

Once you’re happy, lock in the best two-year fixed deal so that you can budget for the repayments over that fixed term. Then, when that term gets within six months of expiring, start the process again.

At that point, many experts predict that rates will have come down further. Lock in a new deal at a better rate then.

‘Ride’ the wave of tracker rates if you feel bold

Or, there’s the bolder approach: take out a tracker mortgage. As the rates come down as predicted, you can ‘ride’ them, so you’re never paying over the odds.

You can then secure a fixed-rate deal once rates have bottomed (wherever that may be). We offer a rate monitoring service, which can help you keep pace with where rates are heading.

The caveat here is that rates can go up as well as down. Whether tracker rates are for you depends on the flexibility of your budget and your attitude to risk. We’re here if you’d like more info.

For homeowners midway through a crippling fixed-rate deal

If you’re one of those unlucky borrowers who locked in fixed rates at around 6%, you do still have a choice. It may be worth speaking to a knowledgeable broker about paying an early repayment charge (ERC). You can then switch to a more competitive rate.

Our brokers can map out both journeys for you:

1. what total amount you’ll repay if you carry on with the expensive fixed-rate deal, vs
2. what you might save by paying the ERC and taking out a lower-rate fixed-term deal.

But do steel yourself: the age of the sub 2% mortgage was, historically, an anomaly, and is unlikely to return any time soon.

Only opt for a deal with which you’re 100% comfortable

From experience, we know that people’s financial circumstances and appetite for risk are unique. What might be right for one homeowner is so the wrong thing for the next. But that’s why we have human brokers: to find out what works for you.

Call us today or request a callback. Within minutes of chatting to us, you’ll wonder why you’ve never used a broker before.

Author: John Yerou

John Yerou is the owner and founder of the award-winning Mortgage Quest Ltd and its subsidiary brands.

In 2004, John began his career in financial services as an independent mortgage advisor and broker. He's since been instrumental in negotiating bespoke mortgage underwriting criteria for professional contractors with many high street lenders.

As such, John's one of the most respected and recognisable names in securing mortgages for the UK's flexible workforce, incorporating independent professionals and the self-employed.

His recognition as the go-to mortgage expert has grown exponentially, reflected in citations and his own publications in both national and contractor-oriented press.

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