Two-year fixed mortgage rates drop as more interest rate cuts expected

When the Daily Star sent a reporter out to spend 60p on a lettuce to see whether it would outlast Liz Truss, she had already sparked off rises that would see mortgage rates increase by 25%. Now however, long after her short premiership (and the lettuce’s slightly longer lifespan), rates are moving in the right direction for clients, and it looks like we should expect more cuts this year.

The big indicator is that two-year fixed mortgage rates are dropping faster than longer-term rates as the financial markets anticipate interest rate cuts from the Bank of England, making short-term mortgages more attractive to clients.

This week, Santander became the first major lender to offer a two-year fixed rate below 4 per cent. The rate for homebuyers with a 40 per cent deposit was reduced from 4.28 per cent to 3.99 per cent.

Since the Liz Truss mini-budget crisis  two years ago, five-year fixed mortgage rates have generally been lower than two-year rates. The market turmoil at that time pushed borrowing costs higher, negatively impacting the UK property sector. However, the difference between two- and five-year mortgage rates has narrowed, reaching its smallest margin in at least a year as the market forecasts that rate cuts are coming sooner than later.

Nicholas Mendes, mortgage technical manager at John Charcol, told the Financial Times: “The gap between two-year and five-year fixed mortgage rates is expected to narrow. By the end of 2024, five-year rates could drop to around 3.5 per cent, while two-year rates are expected to be around 3.8 per cent.”

Mortgage rates are influenced by interest rate swaps, which reflect the average interest rate expected over a specific period. The two-year swap rates have fallen more rapidly compared to five-year swaps as the Bank of England starts lowering its rates, which were previously at a 16-year peak. Markets predict the BoE’s rate cuts will likely be complete within two years.

Lenders are now aggressively reducing rates in response to market conditions and to remain competitive. In the past week, major lenders such as HSBC, Nationwide, TSB, NatWest, and Virgin Money have all slashed their rates.

According to Moneyfacts, the average two-year mortgage rate has dropped from 5.64 per cent to 5.47 per cent in the last month. Buyers, particularly those with substantial deposits, tend to secure better rates compared to those looking to remortgage, as lenders are keen to attract new customers.

On Thursday, the Bank of England maintained its interest rate at 5 per cent, as widely predicted by economists. This followed its first rate cut in over four years last month. The US Federal Reserve also announced a significant half-point rate reduction earlier in the week. Investors now expect the UK's interest rates to drop to 4 per cent by March of the following year.

Over the past two years, five-year fixed mortgage deals have been favoured due to their lower pricing. Aaron Strutt, director at Trinity Financial, told the FT that the introduction of a two-year fixed deal below 4 per cent is “good news because many borrowers do not want to lock in to a longer-term fix."

He added that more lenders would likely follow suit with sub-4 per cent offers in the coming weeks. However, he also noted that despite the appeal of short-term deals, “some people are concerned about potential future shocks to the economy, so they would rather have long-term payment security.”