Mortgage rates are dropping but for how long?

Average mortgage rates have dropped slightly, providing possible respite for homebuyers.

The latest Moneyfacts data shows the average two-year fixed mortgage rate decreased from 6.86% to 6.83%.

The average rate on a five-year deal has also fallen from 6.36% to 6.34%.

Choice has also improved from 4,962 products to 5,016.

Barclays, HSBC and TSB unveiled rate reductions yesterday.

It comes as Rightmove’s weekly mortgage tracker suggested there are signs that rates have hit their peak.

Rightmove’s mortgage expert Matt Smith said: “ There’s been an increase in average rates compared with last week, but we may now see some lenders begin to cut rates as soon as the coming days.

“However, any cuts to rates are likely to be small, at least to begin with, as lenders will be looking to balance their desire to reduce rates with the need to account for any further market surprises as the economy looks to get onto a more stable footing for the long term. 

“It takes some time for lenders to respond to market conditions and feed these through to mortgage rates offered to borrowers.”

This could all be short-lived though as the Bank of England’s Monetary Policy Committee meets next week and is expected to raise interest rates further.

Laith Khalaf, head of investment analysis at AJ Bell, said: “The Bank of England is expected to follow through with another rate rise at its forthcoming meeting, even though a sliver of space has opened up to allow them to pause the rate hiking cycle if they wanted to, with inflation falling back considerably in June. 

“Of course, the consumer price indeix is still way above target, so the Bank is likely to keep its foot on the brake pedal, even though that leads to mounting pressure on the UK’s beleaguered mortgage holders.”

Even if it raises the base rate, Khalaf adds, the Bank may be able to help by providing some soothing rhetoric that offers a chink of light at the end of the tunnel.

He added: “Fixed mortgage rates are based on market forecasts of future interest rates, and so they can fall even while the main bank rate is still going up. 

“The market is now expecting interest rates to top out at 5.75% or 6% by the end of the year, so has already pared back its bets from the height of inflationary panic when rates north of 6% were envisaged. The Bank is still walking a tightrope though, as it tries to tame inflation without breaking the housing market.

“The interest rate decision will be accompanied by a full quarterly economic report from the Bank of England, which will offer greater insight into the Bank’s thinking. It will also provide a forecast for inflation in the medium term based on current market expectations for the base rate. 

“This will act as a guideline for the market about whether current interest rate pricing is on the money, depending on whether inflation remains above or falls significantly below 2% on a three year horizon.

“Any significant deviation from 2%, above or below, could lead to a repricing in interest rate expectations, and consequently the mortgage market, for better or worse. Homeowners might want to have their tin hats at the ready.”