Mortgage rates continue to edge downwards as almost 50 lenders have offered new deals since the start of the year, but experts warn the surprise increase in inflation could buck this trend.
Lenders are competing in a market that has shrunk due to high borrowing costs and are anticipating an interest rate cut from the Bank of England in the coming months.
However, the outlook for near-term rate cuts has become less certain after government data published this morning showed an unexpected rise in inflation in December due to increasing duties on alcohol and tobacco.
Natwest this week became the latest high street giant to offer a sub-four per cent fixed deal, with its second price adjustment this month. Metro Bank and TSB also introduced rate reductions.
HSBC cut rates on its homeowner mortgage products by as much as 0.4 per cent, while The Mortgage Works now offers a two-year fixed rate of 3.69 per cent for buy-to-let customers with a 35 per cent deposit.
The average two-year fixed rate currently stands at 5.62 per cent, while the average five-year deal is 5.24 per cent, according to financial information website Moneyfacts.
Fixed mortgage rates do not change until the product expires and the customer either remortgages or moves on to a variable rate, which current stands at an average of more than eight per cent.
Despite the reductions in fixed rates, around 1.6m borrowers with even cheaper deals that expire this year face a steep rise in costs when they remortgage.
Some experts have warned that mortgage rates could soon tick upwards in line with SONIA swap rates – the main interest rate benchmark in sterling markets.
Mortgage rates are heavily influenced by these swaps, with lenders’ margins on them often between 0.3 and 0.5 per cent.
Two and five-year swaps jumped 0.14 per cent and 0.13 per cent respectively on Wednesday following the inflation data.
“Momentum is likely to slow, and it would be negligent to fully write off a return to the average mortgage rate rising above six per cent just yet,” Arjan Verbeek, chief executive of lender Perenna, told City A.M.
“As the Bank of England is unlikely to drop rates any time soon following this data, a return to a market of ultra-low interest rates is becoming increasingly unattainable.”
Matt Smith, Rightmove’s mortgage expert, added: “Average [mortgage] rates had been falling pretty sharply, but this is likely this to slow as lenders take a more cautious approach over the next few weeks.”
Lenders are already starting to show signs of wariness over how far they will go in slashing rates.
Last Thursday, Co-op Bank pulled its 3.89 per cent five-year mortgage rate, the lowest on the market, after just three days.
“While the rate trajectory is on the whole downwards, borrowers need to be mindful that if they like the look of a rate it might not be around for long,” said Mark Harris, chief executive of broker SPF Private Clients.