Sub 4% mortgages

The reason we are seeing lenders introduce sub-4 percent rates on the longer term fixed rates, such as 5-year fixed deals, is because the SWAP rates are coming down. More lenders will join this space as the competition is getting hot and lenders wants to bring in new customers in this tougher than usual market.

We won’t see 2-year fixed deals less than 2 percent for some time as borrowing in this space is still expensive than usual. By the end of this year we should see 2 year fixed-deals come down to sub 4% and in 2024 we will see 2-year fixed deals coming down to 3% - a lot relies on the economy and if inflation continues to come down.

My prediction is that we are close to what will be come a normal market, with Base rate floating around 3-4%. That will mean 2 year pricing may well reach the low 3's and 5 years the high 3's, but I wouldn't hold out for rates much lower. But in 2007 I would have laughed at Base Rate being 0.25% so anything is possible. The most important thing to do is not wait for dream to become reality and act now - just remember "he who hesitates is lost".

Sub 4% fixed rates were expected given that SWAP rates had been falling up to 7 - 10 days ago, getting as low as 3.251% when Base Rate was increased. In many instances, these SWAP rates influence what banks charge for their product ranges. 5yr SWAPS at 3.251% meant there was enough margin for lenders to reduce rates and still have margin for profit.

2yr SWAPS have been trading higher as we are currently experiencing an inverted yield, meaning shorter-term funding is more expensive than longer, currently trading at 4.152%. This would mean lenders would have to take a larger hit on profit to go sub 4%, so less likely.

When coupled with the fact most lenders have started the year with a blank page for new loans, in contrast to the end of last year when most had done targets, rate wars and lower rates were inevitable.

Manipulations of rate vs fees charged benefits have always been in the marketplace. Buy-to-let lenders are doing this currently by lowering rates to fit the rental calculations set by regulators and increasing the fees on the mortgages. It's the only way they can offer products that work in our current higher rate, higher property values marketplace. The optics of lower rates for the market are good - with positive PR driving some confidence back into buyers. However, overall, it is important to weigh up the rate offered, against the fees charged to obtain the rate. A good broker will be doing this for their clients. The overall lower levels of borrowing, combined with lenders needing to move money will only continue to make the rates more competitive.

Two factors are currently driving down fixed rates - the first is swap rates which are continuing to drop. The second is competition between lenders to secure there share of the market.

As lenders become more confident with risk - they are pricing products much more aggressively. Historically short term fixes have been lower than the longer term alternatives, but in the current market a fixed rate of 5 years or even longer locks a client with a lender and reduces their risk exposure, which means they can offer a much more favourable interest rate.

I hope that we will see 2 Year Products return to a similar level at some point in 2023 , as the longer term options are not always suitable to clients especially first time buyers who have aspirations of moving up the property ladder.

Fixed mortgage rates being below 4% is something we predicted in updates to our clients back in December, we knew that the bank and building societies had panicked over the mini-budget debacle and that sanity would eventually start returning.
We expect the whole 2 and 5-year fixed market however to sit in the 3 - 4% space, remembering that we currently have a Bank of England base rate of 4% and UK lenders taking their margin on top of that for their variable rates of +2/3%, more in some cases.
More lenders are expected to take up the new sub 4% fixed rate position now that things have calmed down, however, the likelihood of a 2% 5-year fixed rate is not going to happen any time soon that's for sure.
Our personal opinion is that a healthy Bank of England base rate at 4 or 4.5% does allow for adjustments to be made when needed.

Many different factors influence fixed interest rates, so it’s impossible to know exactly when two-year fixed rates will fall below 4%. One factor that influences fixed-rate mortgages is Swap Rates. As Swap Rates are still above 4% on Friday 17th February, I’d be surprised to see 2-year fixed rates below 4% right now.

I hope to see 2-year fixed rates below 4% towards the end of 2023, which could be the case if Swap Rates continue to fall and the lenders remain competitive with each other. However, I think these sub-4% rates will only be available at the lower LTV brackets to begin with, similar to what we’ve seen with sub-4% 5-year fixed rates.