There are signs of growing competition between the big mortgage lenders, giving buyers, landlords and investors a welcome boost after months of higher borrowing costs.
Nationwide, Barclays, Santander, Virgin Money and Coventry Building Society have all announced rate reductions in recent weeks. Although the cuts have generally been modest, they mark a change in direction after a period in which mortgage pricing had been moving steadily upwards.
It began when Nationwide and Barclays announced a range of reductions in late June. Barclays followed up with further cuts at the start of July, while Santander reduced rates on a number of products, including selected deals for first-time buyers. Virgin Money and Coventry Building Society have also lowered pricing across parts of their mortgage ranges.
According to Moneyfacts data, the average two-year fixed mortgage rate was 5.52% at the start of July, down from 5.54% a week earlier. The average five-year fixed rate also fell from 5.56% to 5.52% over the same period.
Deals for those with bigger deposits, though, are significantly lower. Nationwide recently offered a five-year fixed-rate remortgage at 4.49% at 60% LTV (loan to value). The Mortgage Works has a five-year fixed buy-to-let mortgage with a rate of 3.99% at 65% LTV, although it does come with a significant fee.*
Why lenders are cutting rates
Mortgage pricing is heavily influenced by lenders’ funding costs, which are linked to swap rates. These are based on market expectations for the future path of Bank of England interest rates.
Swap rates rose during June as the money markets reacted to tensions in the Middle East and the possibility of disruption to global energy supplies.
Conditions have since improved. Lower-than-expected UK inflation data increased expectations that the Bank of England will continue cutting interest rates over the coming year. At the same time, the deal signed between the US and Iran helped reduce tensions in the Gulf and the corresponding pressure on financial markets. Together, they pushed swap rates lower and gave lenders more scope to reduce mortgage pricing.
What it means for investors
For property investors, the significance of the recent cuts extends beyond the savings on individual mortgage payments.
While borrowing costs remain higher than they were before the inflation shocks of recent years, falling rates can improve affordability calculations, strengthen cash flow projections and help make new purchases stack up.
The improving market outlook could be particularly beneficial, though, to landlords whose fixed-rate deals are due to expire over the next 12 months. Lower rates will not eliminate the refinancing shock faced by borrowers, but they could help reduce the gap between expiring deals and the cost of replacement finance.
What happens next?
Further reductions are possible, too, if funding costs continue to ease, although mortgage pricing is likely to remain sensitive to inflation data, Bank of England expectations and wider economic developments.
Most analysts do not expect a return to the ultra-low mortgage rates seen before inflation surged, but recent weeks have demonstrated that lenders are becoming more willing to pass on improvements in market conditions when funding costs allow.
*Prices correct at time of writing.
