The average two-year mortgage rate has dropped below 5% for the first time since the Liz Truss mini-budget. According to Moneyfacts, the interest rate on a typical two-year fixed mortgage deal is now 4.99%. While there are both more expensive and cheaper two-year mortgage products available, the average rate has reached a near three-year low. This shift marks a significant change from the levels seen before Liz Truss’s mini-budget announcement in September 2022.
The implementation of unfunded spending and tax cuts during the mini-budget led to a sharp increase in government borrowing costs. This situation required intervention from the Bank of England to prevent pension funds from collapsing. Consequently, mortgage costs soared, reaching as high as 6% for a typical two-year deal in the weeks following the fiscal event.
The recent reduction in the base interest rate by the Bank of England to 4% has contributed to the decrease in mortgage borrowing rates. Despite concerns about a struggling economy and the prospect of rising inflation, this rate cut has made borrowing more affordable. However, the expectation of heightened price increases has prevented mortgage rates from declining further. The Bank’s decision to maintain relatively high interest rates reflects concerns about accelerating inflation due to factors like poor harvests and increased employer costs.
Moneyfacts, the group behind the data, noted that while borrowing costs remain above the historically low rates preceding the mini-budget, lenders are now competing more aggressively for business. As a result, mortgage providers are hesitant to offer cheaper products. Market analysts predict a further cut to the base interest rate before the end of 2025, with expectations that it may drop to 3.75% by December.
The expectation of future rate adjustments can influence the rates that lenders offer. This dynamic landscape underscores the importance of monitoring economic trends and policy changes when considering mortgage options.
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