How much more will mortgage rates fall? TSB and Nationwide latest to cut prices

Lenders have continued to cut mortgage rates at pace this week, with several more high street names bringing out deals below the 5 per cent mark.

TSB is set to launch a five-year fixed mortgage tomorrow with an interest rate of 4.89 per cent. It is available to those buying a home with a 40 per cent deposit and has a fee of £995.

This is not quite as cheap as Virgin Money’s similar five-year purchase deal, at 4.82 per cent, but that has a bigger fee at £1,295 and is only available via mortgage brokers.

Rate reductions: Most high street banks and building societies have reduced their mortgage rates in the last two weeks, with some deals now cheaper than 5% interest

On an average-priced house (£258,000) with the fee rolled into the mortgage amount, monthly payments would be £902 on the TSB mortgage and £897 for Virgin – based on a 25-year term. 

NatWest is also offering a 4.89 per cent deal, but with a £1,495 fee, which would cost £905.

> Work out how much a mortgage would cost you each month using our tool 

Nationwide has also announced a raft of rate cuts, also from tomorrow. Its lowest-rate fixed deal is now 4.94 per cent on a five-year fix for new borrowers purchasing with a 40 per cent deposit, which comes with a £999 fee.

It follows a flurry of mortgage rate reductions last week from the likes of Halifax, Barclays, Santander and Clydesdale Bank.

This saw the average five-year fixed rate slip below 6 per cent on Thursday, according to the financial information service Moneyfacts. On 2 October, it had fallen further to 5.97 per cent.

The typical two-year fixed rate, including all deposit sizes, is now 6.47 per cent.

The biggest reductions to date have been for those with large deposits or lots of equity in their property, and have largely been focused on those buying a new home.

However, one expert said today’s announcements also include some good deals for those needing to remortgage.

Past the peak: Fixed mortgage rates are falling, but are still much higher than in the recent past

David Hollingworth of mortgage broker L&C said: ‘There’s a growing number of lenders competing hard to take top spot but increasingly we’re seeing five-year rates for home movers dipping beneath 5 per cent, something that would have felt a long way away only a couple of months ago.

‘It’s been noticeable that many of the lowest rates have been on offer to those that are buying a new home rather than borrowers looking for a better rate to switch to.’

This includes a Nationwide deal at 4.99 per cent with £999 fee, for those remortgaging with a 40 per cent deposit or equity.

‘That’s much more in line with the purchase option at 4.94 per cent and will be welcome news for those considering the options as their current fixed rate deal approaches an end,’ Hollingworth added.

It has also made some cuts to its tracker products. 

Some borrowers may prefer to take a tracker at the moment as they often come with no early repayment fees, meaning they would be free to switch to a fixed rate if they became cheaper.

Nationwide’s fee-free two-year tracker for those with a 40 per cent deposit has been reduced by 0.3 per cent to 5.99 per cent, making it one of the market’s cheapest trackers without fees.

Trackers follow the base rate plus a certain percentage decided by the bank, in this case 0.74 per cent.

The base rate did not rise in September, and if that trend continues these deals could become more attractive.  

Rates for those with smaller deposits have also begun to fall. Nationwide also has a fee-free tracker for those with a 15 per cent deposit, which has been reduced by 0.39 per cent and is now priced at 6.22 per cent.

Nicholas Mendes, mortgage technical manager at broker John Charcol, said: ‘This is really laying down the gauntlet from Nationwide.

‘Already offering market-leading rates on 40 per cent and 25 per cent deposits, this latest reduction sees its lower-deposit rates fall further, strengthening its hold in the market.

TSB’s new offering includes a 5.14 per cent rate for those buying a home with a 15 per cent deposit, for example, which comes with a £995 fee and would be one of the top deals for that loan size.

Will mortgage rates continue to go down?

As the big movements in mortgage rates over the past two years have shown, it is not always easy to predict where rates are going next. 

However, borrowers can find a clue as to where the financial markets currently think rates are heading by looking at swap rates. 

These are agreements in which two counter parties, for example banks, agree to exchange a stream of future fixed interest payments for a stream of future variable payments, based on a set amount.

Mortgage lenders enter into these agreements to shield themselves against the interest rate risk involved with lending fixed rate mortgages.

The five-year swap rate is currently at 4.53 per cent. In simple terms, that means the financial markets expect five-year fixed mortgages to be priced at that level in 2028. The two-year swap rate is at 5.06 per cent.  

Experts say this means we are not likely to see rates fall below the next milestone, 4.5 per cent, in the short term.

David Hollingworth said: ‘How long rates can continue this downward trajectory is hard to tell and swap rates seem to have stabilised at a level that would make it hard to see another change in gear to hit 4.5 per cent in the near term. 

‘That may take more time, and more positive news around inflation to give more slack and allow lenders to pass through further cuts.’

However, he said that there could still be some more cuts to come, even if rates do not reach that level.  

Downhill from here? Two mortgage experts have said rates may not fall much further in the short term, and that they might not even reach 4.5% for some time

‘I’d still expect to see more lenders competing harder to keep up with the leading rates and that should see some room for more gradual improvements. 

‘It may not pay to hold out for substantial cuts at the present time, especially if that means holding out on a standard variable rate that could be several percentage points higher than the deals now on offer.

Nicholas Mendes, mortgage technical manager at broker John Charcol, said that while he wouldn’t rule out a fall to 4.5 per cent at the moment, it isn’t certain and the situation could change depending on what happens with inflation and the base rate. 

He said: ‘In the past few days gilts have risen and swaps have edged up due to higher fuel prices, and markets once again predicting further base rate rises following the recent hold in September.

‘Despite this, I think fixed rate pricing on three and five-year fixes will continue to reduce and expect to see five-year fixed rates continue to fall.

‘While no one can accurately be confident, I wouldn’t rule out a five-year fix at 4.5 per cent by the end of the year based on the current pricing trajectory.’