Mortgage rates could fall to 3.5 per cent by the end of the year in good news for homeowners, experts have predicted, following a series of reductions by major lenders.
Despite inflation increasing slightly on Wednesday, economists said the lower-than-expected reading raises the prospect of “multiple” interest rate cuts this year, with brokers telling i this is likely to lead to even bigger mortgage rate cuts.
Cheaper fixed rates would mean households buying homes or remortgaging from this autumn will face lower monthly bills than they otherwise would have, which will come as good news to Chancellor Rachel Reeves as she prepares for her first Budget.
Aaron Strutt of brokers Trinity Financial said: “If the base rate came down by another 0.5 per cent it would be pretty reasonable to expect fixed deals to reduce even more. The cheapest five-year fixes could be around 3.5 per cent which would revive the property market and make mortgages more affordable.”
Nick Mendes of John Charcol brokers added: “Markets are now anticipating that the Monetary Policy Committee (MPC), will make a further 50 basis point reduction by the end of 2024. Previously, I thought rates could reach 3.5 per cent by early next year, but now I think we could see rates falling to that this year.”
Inflation rose to 2.2 per cent in the year to July, but this was still below the Bank of England’s forecast of 2.4 per cent and lower than widespread predictions of 2.3 per cent.
The Bank had previously cautioned against expectations of rapid cuts to interest rates after a cut last week from 5.25 per cent to 5 per cent, but economists are now saying another reduction is possible in September, and that two cuts this year is feasible, something financial traders have now priced in.
This is good news for homeowners who have already seen multiple five-year fixed rates of below 4 per cent hit the market in recent weeks.
Nationwide now offers a best buy rate of 3.83 per cent while Barclays has a rate of 3.84 per cent on offer. Although most require customers to have high deposits or equity, Virgin Money launched a rate of 3.99 per cent for those with just a 25 per cent deposit earlier this week.
The prospect of even cheaper mortgages will come as a political boost for the Government. During the general election campaign, Labour repeatedly accused the Conservatives of driving up borrowing costs because of the markets turmoil sparked by Liz Truss during her brief time in power.
Sir Keir Starmer promised shortly after becoming Prime Minister that mortgage interest rates would come down under his leadership.
However, the recent drop in fixed rate mortgage prices did start in the days before polls opened in the election, although it has accelerated since.
The drop was mainly triggered by expectations for when the Bank would cut interest rates being moved forwards to August, with economists previously having thought the move would be delayed until autumn.
Mortgage experts said that these continued cuts to fixed rate home loans – which are priced on long-term predictions for where interest rates will go – are likely.
Following the inflation data, Clydesdale Bank reduced its two and five-year fixed rates by 0.12 percentage points while MPowered Mortgages also cut rates by 0.22 percentage points.
Lower mortgage rates may also soften the blow for some households ahead of possible touted tax rises in autumn. Reeves is expected to announced new rises in her October budget, which could squeeze people’s disposable income.
“In a cut-throat market rates have already tumbled further with a clutch of big lenders now offering five year fixed rates below 4 per cent, levels not seen since much earlier in the year,” said David Hollingworth of L&C Mortgages.
“That direction of travel is unlikely to be disturbed by reaction to today’s news as the market will have been well prepared for an increase. Instead, we’re likely to see continued and frequent movements in mortgage rates, as lenders continue to adjust and improve where they can,” he said.
Other brokers agreed with Mr Hollingworth’s assessment.
“Inflation remained relatively subdued in July, despite a modest rise, as weaker core and food price inflation largely offset the diminishing impact of earlier declines in energy prices. This provides some comfort to the MPC as the Bank’s forecasts earlier this month had predicted a sharper increase,” Mendes added.
He said the biggest rate drops will be for those opting for five year fixed rates at low loan-to-value (LTV), which are deals which require a high deposit or equity in your home, usually of around 35 or 40 per cent.
Economists have said that the lower-than-expected figures today – particularly the fall in services inflation from 5.7 to 5.2 per cent – could spell more interest rate cuts this year.
Sanjay Raja of Deutsche Bank Research said: “While not our base case, the odds of a back-to-back rate cut are on the rise. A September rate cut should no longer be off the table. And it’s entirely conceivable to think that we could get multiple more rate cuts this year.”
Thomas Pugh, an economist at audit, tax and consulting firm RSM UK, said: “The big surprise was the sharp drop in services inflation to 5.2 per cent, well below the 5.5 per cent expected by the market.”
He said the figures were likely not enough to tip the balance towards a cut in September but added: “It does open the door to two more cuts, rather than just one, later this year.”
Ruth Gregory of Capital Economics said that the Bank is likely to pause rate cuts in September, but the organisation expects rates to fall to 4.5 per cent by the end of 2024, which would mean two cuts of 0.25 percentage points.
There are three more interest rate-setting meetings between now and the end of the year – in September, November and December.