Is there really a mortgage price war?

Mortgages have been getting cheaper, but are lenders really engaged in a price war?

If you're in the market for a mortgage, you've probably seen plenty of headlines over the past few weeks about rate cuts and enticing new deals being launched.

But after the year of mortgage misery that was 2023, you couldn't be blamed for taking such claims with a large pinch of salt.

Here, we look at what's really happening to rates, and get the lowdown from mortgage experts on what might be next.

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What's been happening to mortgage rates?

Mortgage rates have fallen significantly over the past five months, after peaking at an average of nearly 7% last August.

The biggest drops have taken place since the start of this month, with two-year and five-year fixes falling in cost by around 0.3 percentage points since New Year's Day. 

The chart below shows how average rates have changed over the past year. As you can see, costs remain higher than last spring, but lower than the summer of 2023.

Average rates provide a useful guide to what direction the market is going in, but the best rates on the market are significantly lower.

For example, homebuyers and people remortgaging at 60% loan-to-value can currently get a two-year fix at around 4.2%, or a five-year fix at 3.9%. 

• Find out more: the best mortgage rates this week

Is a rate war taking place?

While rates are dropping considerably, it's important to remember that in some cases they're still as much as three times the prices recorded just two years ago.

We spoke to two mortgage brokers to find out why rates have fallen this month. 

David Hollingworth of L&C Mortgages told us: ‘There has been a substantial reduction in funding costs for fixed-rate mortgages, and lenders have been passing that on to the rates they offer customers.

‘The market is competitive, so some lenders are cutting rates to make sure they keep up, especially when the homebuying market has been more subdued.'

Nicholas Mendes of the broker John Charcol says that more than 50 lenders have cut prices this month.

He says: ‘The big picture is that, [overall], inflation is falling more sharply than the Bank of England and financial markets expected a few months ago.

'This has resulted in lenders competing for customers, and sacrificing profit margins for volume.'

• Find out more: how much mortgage can I borrow?

Will the cheapest deals stick around?

When lenders are competing to offer the best rates, it's common for headline-grabbing deals to come and go in the blink of an eye.

Data from Moneyfacts shows the average shelf life of a mortgage deal is currently 21 days, but some eye-catching rates are disappearing far more quickly.

L&C's David Hollingworth says: ‘Co-operative Bank launched some extremely good rates last week, but withdrew a chunk of them after only three days. 

'This will likely be down to the volume of applications and a desire to prevent a backlog building and service being affected.'

This often happens with market-leading deals, when demand from borrowers and increased media coverage result in a deluge of applications.

John Charcol's Nicholas Mendes says: 'While the market might seem stable, it is still prone to movement. If a rate looks attractive, don’t hesitate, as deals that seem too good to be true might just be.' 

Will mortgage rates continue to fall?

The surprise rise in inflation earlier this week could be bad news for mortgage rates. First of all, it may mean the Bank of England takes longer to reduce its base rate, which remains at a 15-year high.

Secondly, it will have an impact on 'swap' rates. In simple terms, swap rates are the rates lenders pay to central banks to borrow money.

They're based on predictions of what the market believes will happen to interest rates in the future. Right now, experts think higher swap rates may prevent mortgage rates from falling quickly.

Matt Smith of the property portal Rightmove says: 'I’d expect swap rates to rise a little in reaction to the new inflation figures. Average mortgage rates had been falling pretty sharply, but this is likely to slow as lenders take a more cautious approach over the next few weeks.'

Mortgage brokers agree. Nicholas Mendes says he expects to see 'a short pause in weekly repricing' of deals and predicts 'high street lenders will reach a point where price drops are minimal, as there won't be room for significant reductions'.

David Hollingworth says these cost pressures mean 'the brakes could be applied' to rate changes. 

• Find out more: house price and mortgage predictions for 2024

How long should I fix for?

One of the most frequently asked mortgage questions is how long you should lock in your rate for. The most common options are two or five years.

Five-year fixes are currently cheaper, but mortgage brokers say demand is highest for two-year deals, as borrowers believe rates are likely to fall further over the next couple of years. 

When we crunched the numbers in December, we found that someone buying an average priced home would pay around £50-£60 a month more on a two-year fix.

Mortgage rates are trending downwards, but, as we saw after the government's mini-Budget in September 2022, anything can happen.

This means it's best to choose a term based on your own circumstances. If you think you might want to move home soon or want to have the flexibility to switch deals again in a couple of years, consider a two-year fix.

If you're planning on staying put and value the certainty of having your mortgage repayments locked in for longer, you might prefer a five-year fix.

• Find out more: should I get a two or five-year mortgage?

Advice on choosing a mortgage

The process of finding the right mortgage can be time-consuming, but as a starting point, follow these tips when comparing deals:

• Look at the overall cost: don't focus exclusively on the initial rate. Some of the 'cheapest' deals come with high up-front fees that could mean you pay more overall. Factor in incentives such as no up-front fee, cashback and free valuations. 
• Consider taking advice from a broker: a whole-of-market mortgage broker can find you the right mortgage deal for your circumstances and guide you through the application process. Additionally, they'll monitor rate changes while you're in the process of applying, and may be able to switch you to a better deal if one emerges. 
• Take note of early repayment charges: longer-term fixed-rate mortgages tend to come with high early repayment charges, which are levied as a percentage of the overall loan. If you move home during the fixed term and can't or don't want to port your mortgage, you might trigger these costs.
• If you're remortgaging, start your search early: you can lock in a new deal up to six months before your current fixed term expires. If rates increase in the interim, you'll already have a better deal locked in. If they fall, your broker may be able to move you on to a cheaper deal.

Find out more: mortgage repayment calculator

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