Average UK Mortgage Rate Is Below 5% for First Time Since Truss
It's a moment many homeowners and aspiring buyers have been waiting for: the average interest rate on a common UK mortgage has finally dipped below 5%. Crucially, this is the first time we've seen such a benchmark since former prime minister Liz Truss’s calamitous mini-budget sent shockwaves through the financial markets in late 2022. If you've been watching the housing market, this isn't just a number; it's a significant psychological and financial turning point.
The immediate aftermath of that September 2022 fiscal event saw mortgage rates surge dramatically, with some fixed-rate products pushing well over 6% and even 7% as lenders scrambled to price in the sudden, unpredictable economic risk. It effectively slammed the brakes on much of the housing market, leaving many remortgaging homeowners facing stark choices and first-time buyers on the sidelines. So, what's behind this welcome shift downwards?
The primary driver has been the sustained fall in Swap rates – the rates at which banks lend to each other – which lenders use to price their fixed-rate mortgage products. These rates have been steadily declining as market expectations for the Bank of England's future base rate decisions have become more dovish. With inflation showing clear signs of cooling, albeit slowly, the consensus is that the aggressive cycle of interest rate hikes is likely over, and cuts could be on the horizon later this year. This improved economic outlook translates directly into cheaper funding for lenders, and in turn, more competitive mortgage deals for consumers.
For those whose fixed-rate deals are expiring or who are looking to purchase, this means a tangible difference in monthly outgoings. While rates aren't returning to the ultra-low levels seen pre-pandemic, a move from 6% to below 5% on a typical mortgage can save hundreds of pounds a month, significantly improving affordability. It's a breath of fresh air for many households that have been grappling with the cost-of-living crisis from multiple angles. We're seeing lenders, ever keen to attract new business, increasingly keen to pass on these reduced funding costs to consumers, creating a more competitive landscape.
Meanwhile, the broader UK housing market stands to benefit. While it won't trigger a sudden boom, a sustained period of easing mortgage rates tends to inject more confidence into both buyers and sellers. It could help stabilise property prices and potentially lead to a modest uptick in transaction volumes after a period of relative stagnation. However, it's worth remembering that affordability challenges remain, particularly for those on lower incomes, and the economic landscape is still navigating various headwinds, from geopolitical tensions to persistent, albeit easing, inflationary pressures.
Looking ahead, the direction of travel for mortgage rates will largely depend on the Bank of England's next moves and the continued trajectory of inflation. While the immediate news is positive, the market remains sensitive to economic data. For now, though, this dip below 5% represents a crucial step towards normalisation in the UK mortgage market, offering a glimmer of hope and relief after a turbulent couple of years. It’s a sign that the worst of the volatility unleashed in 2022 might finally be behind us.
