Mortgage lenders are currently slashing rates, with two-year fixed deals now at their lowest in nearly three years. According to Moneyfacts, the average two-year fixed mortgage rate stands at 5.12%.
This marks a 0.14% drop over the past month. Five-year fixed rates have also fallen, now averaging 5.09%, down from 5.48% in May last year.
The last time two-year fixes were this low was back in September 2022, when they dipped to 4.24%. For five-year deals, the last time rates were at 5.09% was in November 2023.
Major lenders like NatWest, Halifax, and TSB have recently reduced their rates. However, the pace of reductions appears to have slowed compared to previous months.
Rachel Springall, a finance expert at Moneyfacts, commented that the mortgage market has remained fairly subdued this week, but it’s positive to see lenders still cutting fixed rates instead of increasing them.
These lower mortgage rates come just ahead of the Bank of England’s next base rate announcement, which is due tomorrow. The base rate, which currently sits at 4.25%, has been reduced four times consecutively this year.
This has provided relief to many homeowners, lowering monthly mortgage costs. First-time buyers have also benefited from more accessible rates when stepping onto the property ladder.
Despite this, the Bank is widely expected to keep the base rate unchanged due to persistently high inflation. Recent figures show inflation edged down to 3.4% in April—still above the 2% target.
The Bank of England relies on interest rates as a key tool to control inflation. Higher rates typically reduce spending and help curb price increases, while sharp rate cuts can reignite inflation.
Other economic factors are also at play. Rising tensions in the Middle East, particularly between Israel and Iran, have pushed up global oil prices—raising the risk of renewed inflationary pressure.
Further uncertainty stems from global trade policies, including tariffs imposed by former U.S. President Donald Trump, which have affected economic stability.
Domestically, the UK economy shrank significantly in April, and unemployment has climbed to its highest level in nearly four years.
Laith Khalaf, head of investment analysis at AJ Bell, remarked that interest rate decisions are becoming increasingly complex. He pointed out the “smorgasbord of mixed messages” facing the Bank of England.
Khalaf added that if the Bank were to cut rates now, with inflation still more than 1% above the target, it would face tough questions.
Nevertheless, markets are anticipating a base rate cut in August, during the Bank’s next scheduled meeting. This expectation is partly why mortgage rates continue to fall for now.
Why have mortgage rates been coming down?
Mortgage rates in the UK are not solely determined by the Bank of England’s base rate – they are also influenced by swap rates.
Swap rates represent the interest a lender agrees to pay a financial institution in exchange for funds. These rates are shaped by market expectations of where the base rate is likely to head, taking into account broader factors such as inflation and the overall economic outlook.
Generally, when swap rates fall, mortgage interest rates tend to drop as well.
According to Rajan Lakhani, a personal finance expert and Head of Money at Plum, a decline in swap rates combined with increased competition among lenders has led to more attractive mortgage deals. This includes some of the most favourable rates seen in recent months, particularly for buyers and those looking to remortgage.
He also noted that markets are still expecting the base rate to fall further later this year, and this expectation is already being partially reflected in the more affordable mortgage rates available to consumers.
Laith Khalaf, Head of Investment Analysis at AJ Bell, added that recent cuts to mortgage rates are more likely a result of lenders competing for customers than a major change in the forecast for interest rates.
He suggested that closely watching how the Bank of England’s Monetary Policy Committee votes in its upcoming meeting could offer valuable insights into the future direction of interest rates.
Should you lock in to a mortgage deal now?
With mortgage rates currently low, many homeowners and buyers are now wondering whether to lock in a deal or hold off in the hope of further base rate cuts.
John Tucker-Fraser, Head of Mortgages at Mojo Mortgages, explained that even if the Bank of England keeps the base rate unchanged in its upcoming announcement, we shouldn’t expect an immediate rise in fixed-rate mortgage prices.
This is because financial markets typically anticipate such decisions in advance, meaning any outcome has likely already been factored into existing mortgage pricing.
However, he warned that the outlook for future interest rate reductions remains uncertain. Persistently high inflation could result in fewer or slower base rate cuts than previously hoped.
For those whose fixed-rate mortgages are due to expire soon or who are actively looking for a new deal, securing a rate now could offer peace of mind. It may protect borrowers from unexpected rate hikes later on.
Tucker-Fraser advised speaking with a mortgage broker for personalised guidance, tailored to individual circumstances and financial goals.
Rajan Lakhani, a personal finance expert, echoed this advice. He emphasised that the decision to fix or wait depends heavily on affordability and an individual’s tolerance for financial risk.
He pointed out that if a competitive fixed-rate deal is available now and would help reduce your mortgage costs, there’s little harm in locking it in—especially if it fits comfortably within your budget.
Lakhani also noted that although many hope rates will continue to fall, there’s no certainty that this will happen. Fixing now can bring stability to one of your largest monthly expenses.
On the other hand, if you’re prepared to take on some risk, opting for a variable or tracker rate mortgage might be worth considering.
While fixed-rate mortgages remain steady for the length of the deal, tracker mortgages move in line with the Bank of England’s base rate—meaning monthly payments can fluctuate.
Lakhani added that there are some attractive tracker deals currently available, with rates closely aligned to those offered on fixed products.
He stressed the importance of doing thorough research and seeking independent advice to ensure you choose the most suitable mortgage option for your situation.
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