Two-year mortgage rates have fallen below five-year deals for the first time since former prime minister Liz Truss’s “mini-Budget”, as markets expect interest rates to fall only gradually in the near term.
The shift comes as the Bank of England voted to cut the base rate from 4.25% to 4% last week.
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Adam French, head of news at Moneyfacts, calls it a “symbolic turning point”.
He tells MoneyWeek: “While the cost of borrowing is still well above the rock-bottom rates of the years immediately preceding Truss’s mini-Budget in 2022, hitting this milestone shows lenders are competing more aggressively for business.”
While this month’s base rate cut (on 7 August) represents the third reduction of 2025, doubts are growing over whether we’ll see any more cuts this year. Some analysts expect the rate to now hold at – or just below – 4% well into next year.
However, the mortgage cuts are slowing, and most lenders would have already priced in last week’s widely-expected base rate reduction.
Nicholas Mendes, mortgage technical manager at the broker John Charcol, comments: “Mortgage rates have been edging lower in recent weeks, helped by falling swap rates and a fresh price war among lenders. Many banks are off their annual targets, particularly on the purchase side, so they’re sharpening rates to compete for remortgage business instead.
“That’s why we’ve started to see a handful of five- and two-year fixed rates priced below 3.8%, even as inflation remains above target.”
Which mortgage lenders are cutting rates?
Earlier this summer, it was difficult to keep up with all the mortgage rate cuts.
In July, HSBC cut rates three times in just two weeks. Halifax, Barclays, Nationwide, Santander and Skipton Building Society were among other lenders to reduce their rates, leading to brokers speculating that a mortgage price war had broken out.
The number and frequency of rate cuts has fallen to more of a trickle now. HSBC, TSB, Yorkshire Building Society, Coventry Building Society and Virgin Money are some of the lenders that have trimmed their mortgage deals in recent days.
Saffron for Intermediaries, part of Saffron Building Society that lends via mortgage brokers, says it will make “significant rate reductions” to selected products across its buy-to-let range on 13 August. Skipton Building Society will cut some residential and buy-to-let rates on 12 August.
Interestingly, Gen H, a specialist lender focusing on the first-time buyer market, has bucked the trend by hiking some of its fixed rates by up to 0.25 percentage points, while cutting the cost of other deals.
Ahead of the Bank rate cut on 7 August, major lenders including Halifax, HSBC, Nationwide Building Society, Santander, and TSB lowered their fixed-rate mortgage pricing in anticipation of the Bank voting to reduce the base rate.
There are dozens of fixed-rate mortgage deals priced at below 4% now, with some lower than 3.8%.
What is the forecast for mortgage rates?
In terms of interest rate expectations, markets are pricing in one more cut this year. This is forecast to happen in November, with another one in February, bringing the base rate to 3.5%.
However, doubts are growing over whether these reductions will materialise – and the Bank made it clear last week that it won’t rush to lower rates.
While August’s cut from 4.25% to 4% was widely predicted, the Bank of England’s Monetary Policy Committee (MPC) voted 5-4 in favour of it with four members voting to hold rates unchanged, while one called for a 50-basis point cut.
Having almost half of the committee wanting to keep rates at 4.25% caught the market by surprise.
George Lagarias, chief economist at the advisory firm Forvis Mazars, comments: “While the rate cut was fully priced in by financial markets, the number of hawks on the MPC (four) is somewhat of a surprise.
“What will the move mean for consumers going forward? That there’s enough resistance in the Bank of England towards sharper cuts, for rates, and thus mortgages, to remain elevated for some time."
Laura Suter, director of personal finance at AJ Bell, adds: “Any homeowners who are hoping that [last week’s] cut will mean a drop in rates could be disappointed. The rate cut was widely expected, meaning that markets have priced in the rate cut for some time.
“It means the chop to rates is already reflected in fixed-term mortgage rates. Barring any bond market turmoil off the back of any comments made by the MPC, we’re unlikely to see a dramatic move in mortgage rates.”
The Bank’s Monetary Policy Committee will meet three more times this year to set the base rate (September, November and December).
Any cuts – or expected cuts – are usually favourable for mortgage rates. However, there are plenty of things that could derail interest rate predictions, and/or how mortgage lenders price their deals.
Mendes points out that mortgage rates may follow the path of interest rate cuts, “but not always in a straight line”.
He explains: “Fixed-rate pricing is driven by swap rates, and those move based on where markets think the Bank rate is headed, how inflation is trending, and what’s happening globally. A surprise data print, tariff announcement or geopolitical flare-up could all change the outlook overnight.”
According to Mendes, the good news for homeowners is that the volatility of last year has calmed. “Mortgage rates are falling gradually, and there’s a strong sense of competition among lenders, especially as many are under pressure to grow their loan books.”
He thinks that the best mortgage deals could reach the “low threes” next year, particularly for borrowers with large deposits or equity.
In other mortgage news, the Financial Conduct Authority (FCA) has launched a discussion paper on the future of the mortgage market.
The regulator says that first-time buyers, the self-employed and people borrowing into retirement could benefit from changes to mortgage rules.
One option is to bring back interest-only mortgages; the FCA says: “We would like views on whether our rules could better support more interest-only mortgages”. Making equity release products more flexible could also be on the cards.
The regulator will report back later this year or next year about whether any mortgage changes will be implemented.
Should you fix your mortgage?
If the last two years of rises and falls have told us anything, it's that predicting falls in mortgage rates is not an exact science. So, if you have one of the estimated 1.6 million fixed mortgage rates that is expiring this year, should you opt for another fixed deal?
David Hollingworth, associate director at the broker L&C Mortgages, says homeowners should start reviewing rates several months before their fix finishes. Locking in a rate now will offer protection against any future increases, and if rates fall before your current fix ends, you can switch onto the lower rate.
However, do double-check the time window for locking in a new deal, as some lenders have reduced theirs to just three or four months.
Fixing your mortgage will provide peace of mind. However, if you're happy to take a gamble, and believe that interest rates will fall over the duration of your next mortgage deal, you could consider a base rate tracker.
Mendes comments: “The key concern for many borrowers is affordability. Those who locked in rates at 1-2% several years ago are now facing remortgage offers of around 4-5%, which could add hundreds of pounds to their monthly repayments.
“Some may choose to fix their rate now for certainty, while others may opt for a variable or tracker mortgage in the hope that rates fall. There’s also the option of shorter 18-month to two-year fixed deals, allowing borrowers to reassess their options once rates have declined further.”
With two-year rates slightly cheaper than five-year deals on average, the incentive now, for many borrowers, will be to sign up for a shorter-term mortgage.
So, first-time buyers and those remortgaging will need to weigh up whether to go for a short-term rate, which is a bit cheaper, or lock in for the long term and shield themselves against any future rate increases.
Katie Brain, banking expert at Defaqto, comments: “When rates increased, many people were reluctant to fix for too long. Now we’re seeing those rates come down, those that want the financial stability of knowing their mortgage payment is fixed for a prolonged length of time may start to reconsider those five-year products or even longer.”
What about variable mortgage rates?
About 1.1 million homeowners are on variable-rate mortgages, which are linked to the Bank of England’s base rate, according to UK Finance. This includes tracker deals and standard variable rates (SVRs).
The average SVR is an eye-watering 7.42%, according to Moneyfacts. The average two-year tracker costs 4.75%.
Those on a high SVR would be wise to switch onto a fixed rate now. Even if fixed rates fall this year, the money saved from getting rid of an expensive SVR earlier could make it worth it.
Rachel Springall, finance expert at Moneyfacts, says: “It’s essential for borrowers not to delay finding a new deal, particularly if they are sitting on an expensive SVR.
“However, with the lowest rate mortgages grabbing the headlines, it’s vital borrowers seek advice to find the most appropriate package for them, and not just be swayed by the initial rate.”
What about buy-to-let rates?
According to Moneyfacts, the average two-year buy-to-let mortgage rate on 11 August was 4.91%, while the average five-year buy-to-let fix was 5.23%.
These rates seem quite competitive compared to how high they have been over the past few years. Buy-to-let mortgage rates were pushing 7% in the summer of 2023.
Buy-to-let investors also have greater choice, with a record 4,509 buy-to-let mortgage products available.
Landlords will be hoping for a further fall in mortgage rates this year, to help offset the 5% stamp duty surcharge and less generous mortgage interest tax relief.
Mortgage support available
Mortgage rates are much higher than when many people would have last remortgaged. Millions of homeowners will be coming off rates as low as 1% or 2%.
If you’re struggling to make your mortgage repayments, the good news is that lenders representing 90% of the mortgage market have signed up to the government’s mortgage charter. They include the big banks like Halifax, HSBC and Santander and building societies like Nationwide, Leeds and Skipton.
The charter is a series of support measures intended to help those in difficulty. Borrowers will be able to make a temporary change to their mortgage for six months to give them some breathing space, such as switching to interest-only payments or extending their mortgage term to reduce their monthly payments. Customers have the option to revert to their original term within six months by contacting their lender.
About 1.4 million mortgages have benefitted from the mortgage charter since it was introduced in June 2023, according to the City watchdog.
Meanwhile, there is a 12-month delay before repossession proceedings can start against those who have missed payments. Regardless of whether your lender has signed up to the charter, all lenders also have a range of measures in place for customers experiencing difficulties.
Should I overpay my mortgage?
If you’ve got some spare cash and you're on a low rate, overpaying your mortgage can be a good way to protect yourself before your mortgage deal expires and you have to remortgage at a higher rate.
Our mortgage overpayment calculator shows how your monthly repayments will change and help you decide if it is worth it.
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