When will 5-year fixed rate mortgages go to 3.5%?

It's great to see another good deal from a lender in relation to a five-year fixed rate and it does show where lenders are expecting rates to go in the medium to long term. The mortgage market is very competitive at the minute and I have just had confirmation through from another lender that they are reducing their rates. At the minute I can't see someone dropping below 3.5% for a fixed rate. But 2 or 3 months ago I couldn't see a sub-4% fixed rate being available, either. As long as lenders are competing as they are, there is always a chance that other lenders will follow suit to get extra business.

Let’s face it, this 3.75% rate is only available to a select subset of customers. They require a maximum of 60% LTV and the minimum loan amount is £400,000. It’s also important for clients to not just focus on the interest rate alone. It’s not uncommon for ‘low’ interest rates to have higher fees. For example, this 3.75% rate comes with a £1,999 fee, whereas other products may have a lower fee or no fee. It’s important to look at the total cost. If Swap Rates reduce further, paired with the general competition between lenders, we may see lenders getting closer to the 3.5% rate level, but I think we’re a few months away yet. I expect that the Base Rate review in March will provide useful insight, and I’ll be paying particular attention to what happens to Swap Rates following this.

You'll always tend to see lenders at the beginning of the year competing with each other to win business and to try and hit their targets as early as possible. The way the rates are reducing on 5-year fixed deals, I wouldn't be surprised if we see rates as low as 3.5% from the end of March/early April. More lenders will follow suit with the price war pulling them in from all over. If we continue to see inflation decrease and SWAP rates improve, we could well be in a position where 5-year fixed rates are around 3% towards the end of the year.

The Bank of England is set to continue increasing rates whilst inflation remains high and we expect a further 0.5% rise in the Spring. However, inflation is set to plummet and with that news, rates will be slashed later in the year, so it's no surprise that lenders are offering to lock you in for five years knowing the central bank rate is set to crash. We will certainly see 3.5% five-year fixes by the summer, if not sub-3% options but a more sensible option for those willing to risk some uncertainty would be to go for a tracker.

With five-year UK swap rates currently just over 3.8%, it's possible 3.5% deals could be available in a few months if the Bank of England signals its intention to cut the base rate. Assuming there are no more inflationary shocks, the base rate could fall in late spring or early summer.

It would be great to see other lenders follow suit in reducing rates but each lender will have their own reasons for increasing or decreasing them based on various factors. So in truth we never really know what the lenders will do. I feel that rates will probably remain stable and similar to where we are now for the remainder of the first half of the year.

Co Op/Platform are already aware that they will only be on the top lender charts for a few days even with these great rates. Lenders are fully aware of what each other is going to do and at the moment they are all being tactical. The drive for business is so fierce at the moment that we are going to see lenders drive their margins down to gain business and momentum at the beginning of the year, so I am fully expecting a rate close to 3.5% in the next few weeks even if it is for a short period of time. I don't think we will see 3.5% rates across all lenders though until later on in the year.