Image source, Getty Images
- Author, Faarea Masud
- Role, Business Journalist, BBC News
Nationwide is offering a mortgage with an interest rate of less than 4% as competition between lenders heats up ahead of the Bank of England’s next rate decision.
From Wednesday, the UK’s largest building society will cut its five-year fixed mortgages, for new customers moving in with a 40% deposit, to a rate of 3.99%.
Other lenders have also cut rates in anticipation of a hoped-for rate cut by the central bank in August.
Mortgage analyst Kylie-Ann Gatecliffe said this could be the start of a “rate war” between the big banks.
The last time Nationwide offered rates below 4% was in February.
“While this is only available for purchases at the moment, we hope the remortgage market will follow,” said Sarah Tucker, founder of The Mortgage Mum.
Mortgage borrowing costs remain higher than at any time in a decade for homeowners because lenders base their mortgage rates on the central bank’s rate.
The rate remains at 5.25%, its highest level in 16 years, but some predict it will be lowered at the central bank’s next meeting on August 1 as inflation falls.
Central banks tend to raise borrowing costs when inflation is high and lower them when inflation is low or to stimulate a sluggish economy.
Around 1.6 million existing borrowers will seek to refinance their home loans when their current fixed-rate contracts expire, with some dropping below 2%, forcing them to pay much more for their next home loan.
However, Ms Tucker says Nationwide’s new rate is “an extremely positive sign for the mortgage market” during a “turbulent time” as people struggle with high living costs and high borrowing rates.
“It’s a fantastic sign of stability and lower interest rates to come,” she said, adding that the recent general election “helped consumers and the market feel more stable.”
The average five-year fixed mortgage rate for homeowners is 5.40%, down from 5.47% on Monday, according to data from Moneyfacts.
The average two-year fixed mortgage rate for homeowners is currently 5.81%, down from 5.88% on Monday.
“Mortgage rates could fall further, but it’s hard to say how quickly and by how much,” said Rachel Springall, financial expert at Moneyfactscompare.co.uk.
She added: “Those waiting for the Bank of England to cut its policy rate may be keeping their fingers crossed for August, but this has divided economists who are now pointing to September at the earliest because of stubborn services inflation.”