Nationwide cuts mortgage rates as they dip below 4% for first time since February

Nationwide has reduced one of its five-year mortgage rates to 3.99%, becoming the first major lender to offer a sub-4% deal since February.

The five-year mortgage deal is available to new customers moving home with a 40% deposit, and comes with a £1,499 fee. The rate was previously 4.18%.

Other lenders have been lowering their rates ahead of a hoped-for interest rate cut by the Bank of England next month.

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The base rate of 5.25% has been held at a 16-year high for almost a year. 

Experts say that a mortgage rate starting with a “3” is a major milestone, and that five-year fixed rates could fall as low as 3.5% if a base rate drop of 0.25% happens in the next few months.

The Bank of England will next meet to decide the base rate on Thursday, 1 August. The following meeting is on 19 September.

Ben Thompson, deputy CEO at Mortgage Advice Bureau, said: "Fixed-rate mortgages under 4% are back on the market showing there are deals to be had. The reality is that lenders have already priced in that all-important first rate cut, whether it comes in August or September.”

The cheapest two-year fixed-rate mortgage on the market is also currently offered by Nationwide, at 4.41%.

When did we last see mortgage rates below 4%? 

The cheapest fixed-rate mortgage today is Nationwide’s 3.99% deal. Compare this to the lowest mortgage rate on 1 July (4.45%) and on 1 June (4.31%) and it’s clear that rates have been tumbling in recent weeks.

Other lenders that have made cuts to certain mortgages recently include Barclays, HSBC and Santander.

The last time any lender offered a sub-4% mortgage deal was in April, when AIB NI offered a five-year fix at 3.99%.

However, in terms of a major mortgage lender offering such a cheap deal, you have to go back to February. Back then, Nationwide had a five-year fix of 3.84%. The data analyst Moneyfacts tells MoneyWeek that other big lenders like NatWest, Lloyds Bank, HSBC, Halifax and Santander also had sub-4% deals in February.

Rachel Springall, finance expert at Moneyfactscompare.co.uk, says: “Fixed mortgage rates are on a downward trend, which will be a relief to borrowers.”

What are the best deals for those remortgaging?

Nationwide’s headline 3.99% deal is only available to those moving home. 

In contrast, the same five-year fix from the UK's biggest building society for someone remortgaging (with a 40% deposit and £1,499 fee) is 4.27%. This rate was also cut today; it was previously 4.35%.

The lowest remortgage rate across the whole market is 4.2% from NatWest, according to Moneyfacts.

So, while those looking to move home may be celebrating a return of sub-4% mortgages, homeowners wanting to remortgage may not be feeling quite as happy.

About 1.6 million existing borrowers will be looking to re-mortgage this year as their fixed-rate deals expire, with some moving off a rate of less than 2%, meaning they face much higher repayments on their next home loan.

Why are remortgage rates higher? 

According to Justin Moy, managing director of the broker EHF Mortgages, cheaper rates for those moving, rather than remortgaging, “has been a tactic from lenders throughout 2024, in their quest to kick-start the homebuying market”. 

He adds: “This type of business is pivotal to the lending targets of lenders, as risk profiling and property values are at their most accurate when compared to other types of borrowers. Those remortgaging will tend to feel the full benefit later as rates continue to slide for the better.”

Elliott Culley, director at Switch Mortgage Finance, tells MoneyWeek that while mortgage rates starting with a 3 is a “significant milestone”, most lenders offer better rates on purchases to remortgages. 

He explains: “The purchase market took the biggest hit when rates started to rise, so lenders want to attract potential new customers to homeownership. The sad reality for mortgage holders is they will always pay slightly higher rates as they will need to remortgage regardless.”

However, Springall is confident that it is “only a matter of time before the lowest rates for remortgage customers fall below 4%”.

Will mortgage rates fall further?

All eyes will be on the Bank of England to see if it cuts interest rates this summer or autumn.

Olivia Harland, senior mortgage consultant at Cleerly, a specialist broker, comments: “If there is a base rate drop of 0.25% in the next few months as predicted by many, we could see five-year fixed rates as low as 3.5% very soon.

“Two-year fixed rates are currently priced a bit higher than five-year fixed rates, but we would expect these to drop by a similar amount.”

One potential risk that could upset the trend of falling mortgage rates is the fact that soaring rents could lead to more activity in the property market, with more buyers looking to buy rather than rent. 

“This means more demand and competition, which could mean these rates [like Nationwide’s 3.99% deal] don’t last that long – especially if the base rate doesn’t drop,” says Harland. 

According to Springall, it’s difficult to tell how quickly mortgage rates could fall and by what margin. “Typically, a brand with a large presence in the market that cuts rates can encourage other lenders to review their rates to compete.”

She adds: “Those waiting for the Bank of England to cut base rate may be crossing their fingers for August, but this has split opinions among economists who are now pointing towards September at the earliest due to stubborn service inflation.”

Should I choose a two-year or five-year fixed rate?

Some buyers and homeowners may be inclined to choose a variable mortgage rate, given that rates are predicted to fall.

For those that prefer the certainty of a fixed rate, the main choice is between a two-year and five-year deal.

As it stands, five-year mortgages are cheaper than a two-year equivalent. The average two-year fix is 5.79%, while the average five-year deal is 5.39%.

But if rates do fall, homeowners taking out the cheaper five-year fix won’t be able to switch to a better deal as quickly as they would if they had taken out a two-year mortgage. So, they could end up paying more overall.

Brokers say that many customers are preferring to take out a two-year fix. 

“Nationwide has launched the cheapest two-year fix at 4.41%, undercutting Barclays’ deals. This is a decent rate that many borrowers will find more attractive than the 3.99% fix mainly because we expect rates to come down more over the next year or so,” says Aaron Strutt at the mortgage broker Trinity Financial.