Hope for homebuyers as rates fall on UK fixed mortgage deals

Borrowers got a glimmer of good news after average rates on new two-year and five-year fixed mortgages fell for the first time since May.

The news of the small drops came 24 hours after it was announced that UK inflation fell more than expected in June, immediately sparking speculation that the Bank of England would not raise interest rates as much as previously expected. The price of fixed rate mortgage offers is closely related to expectations of future interest rate increases.

Financial data provider Moneyfacts said the average rate on a new two-year fixed-rate deal was now 6.79%, down from 6.81% on Wednesday. Meanwhile, the typical rate on a new five-year arrangement dipped to 6.31%, from 6.33% the day before.

The seemingly relentless rise in the cost of new offers has been putting pressure on prospective homebuyers and those whose fixed-term offers are about to expire, and the new data will inevitably raise hopes in some quarters that the new fixed rates may have reached its peak. However, it is too early to tell if these small dips are the start of a trend or just a problem.

The price of fixed-rate mortgages has been on a rollercoaster ride in recent months: The new two-year average fixed rate was priced at about 4.75% at the end of September of last year, but by early November it had risen to 6.47%. In the following months, rates gradually eased back as markets stabilized, until spooked again by a smaller-than-expected drop in the UK inflation rate at the end of May. They then resumed their upward march, and the two-year average rate has approached 7%.

Official data on Wednesday revealed that the UK inflation rate eased to 7.9% in June. Had the rate stayed above 8%, some economists have suggested the Bank of England may have opted for another half-point interest rate hike next month from the current level of 5%. However, they are now betting that a quarter point increase is more likely.

Nicholas Mendes, technical manager of mortgages at broker John Charcol, said Wednesday: “It will be a few months before we see substantial declines in fixed-rate prices.”

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However, Lewis Shaw, founder of brokerage Shaw Financial Services, said: “I’m going to go out on a limb here to say that fixed mortgage rates have peaked. We may see a little bit of change, but the continual painful spikes are over.”

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