Is a rate war going to drive mortgages below 4%?

These experts say yes – and maybe sooner than you thought

By Matthew Sellers

18 Dec 2024

It’s been widely predicted that maybe we won’t get a rate cut this week (thanks, Rachel) but that having been said, big lenders may actually help us all out anyway – at least some people think so.

Those big lenders are actually already reducing rates as they compete in an end-of-year pricing battle to meet their sales targets. Last week, NatWest, Santander and Barclays all lowered their mortgage rates, despite the fact that the Bank of England is expected to keep its Bank Rate unchanged during its final meeting of the year on Thursday.

Industry analysts say the rate cuts are part of a push by lenders to hit annual sales goals, with many expecting these reductions to continue into January. The cuts coincide with an unusually active December in the housing market, as buyers rush to finalise purchases before Labour’s planned stamp duty hike in April.

Santander slashed rates by up to 0.23 percentage points across more than 70 products, while NatWest reduced rates on its two- and five-year fixed mortgages by as much as 0.39 percentage points. Barclays also made cuts, with reductions of up to 0.14 percentage points.

Chris Sykes, director at Private Finance, told The Telegraph: “Lender targets reset in January so they go strong on pricing to get business early. I know that some lenders have ambitious targets next year targeting market share with rate diversification and criteria, so it is looking positive for next year and hopefully there are no spanners in the works.”

Lewis Wilson, from Nicola Amidulla Mortgages, agreed. “Everything seems to be going back on the correct downward trend. I'd like to think in mid to late January we should drop below that 4% bracket again,” Amidulla explained to Mortgage Introducer. “I think it will initially be on a five-year product and you will get the two-year probably a couple of months later.”

Fixed-rate mortgage pricing, which depends heavily on swap rates, has also been trending downward over the past month. Currently, five-year swap rates are near 3.8%, while two-year rates are hovering around 4.1%.

“I think it's still quite tough out there for people, but I do think it'll go below 4%,” agreed Chris Schutrups, founder of Southampton’s The Mortgage Hut. “I think probably [we’ll get to} 3.75%. I think in Q1 we'll definitely see the start of those reductions in rates for sure, but steadily, not any big surprises, I don't think.”

Market confidence has been further boosted by expectations of a lower Bank Rate in the future. Earlier this month, Bank of England Governor Andrew Bailey hinted that there could be as many as four rate cuts next year. The Bank Rate currently sits at 4.75%.

Nevertheless, the Monetary Policy Committee is taking a cautious, “gradual” stance toward rate reductions, as global economic challenges and persistent UK inflation create uncertainty. As Schutrups explains: “I was at an event only three months ago where one of the heads of lending for one of the big four banks said that their economists predicted that there would be eight rate drops next year, and now the Bank of England governor has come out only a couple of weeks ago and said there will be four rate drops next year. The drops in rates are not going to be as quick, or as regular, as people think.”