Best 5-year fix mortgage drops to 3.75% – will they get cheaper?

Homeowners hit by the spike in mortgage rates have another a glimmer of hope as the best five-year fixed rate mortgage has come down to 3.75 per cent – but will rates keep dropping?

Last autumn, the mini-Budget triggered chaos in the bond market resulted in a sharp increase in the cost of borrowing, directly hitting fixed mortgage rates.

No one was quite sure how long it would take rates to fall, with most brokers and market experts expecting them to settle somewhere between 4 and 5 per cent during 2022.

However, at the start of February we saw the first five-year fixed mortgages go below 4 per cent as HSBC and Virgin Money released rates at 3.99 per cent and 3.95 per cent, respectively. This led to declarations of a ‘mortgage rates war’ from property commentators as lenders fight to attract customers.

Now Platform, part of The Co-operative Bank, has announced five-year fixed rates starting at 3.75 per cent from Monday 20 February.

Mortgage market watchers are now asking whether rates will continue to drop and fall back below 3.5 per cent on five-year fixes. 

Nicholas Mendes, mortgage technical manager at broker John Charcol, said: ‘Platform have a history for unsettling the bigger banks in the market. Platform had one of the lowest five-year fixed rates in the market in October 2021, at 0.79 per cent.

‘Platform’s pricing hasn’t only laid down the gauntlet on five-year fixed pricing but also their two-year fixed rates hovering above 4 per cent also provide an interesting proposition for homeowners, who may have felt that longer term fixed rates were their only option for a decent rate.’ 

Will we see rates fall below 3.5% before the summer?

A good indicator of where mortgage rates are headed is to look at swap rates. Most lenders rely on swap rates to price their mortgage products.

Swap rates are an agreement between banks where they exchange a stream of future fixed interest payments for another stream of variable ones, based on a set price. 

They tend to show where the markets think mortgage rates are headed in the longer term, and are factored in to homeloan prices.

Graham Cox, director of Selfemployedmortgagehub, said: ‘With five-year UK swap rates currently just over 3.8 per cent, it’s possible 3.5 per cent 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, base rate could fall in late spring or early summer.’

Currently the Bank of England is expected to hike its base rate for the final time in this cycle to 4.25 per cent next month, before lowering it later in the year if inflation continues to fall.

‘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 five-year fixed deals, I wouldn’t be surprised if we see rates as low as 3.5 per cent from the end of March/early April,’ says Gaurav Shukla, chief executive of mortgage broker Home Me.

‘If we continue to see inflation decrease and swap rates improve, we could well be in a position where five-year fixed rates are around 3 per cent towards the end of the year.’

However, other experts are less certain that rates will continue to fall.

Natalie Hines, founder of broker Premier One Mortgages, said other lenders could follow Platform but most will keep rates steady.

‘Although I expect to see five year fixed rates come down to 3.5 per cent, how low they go will be a guess – and for how long,’ Mendes said.

‘The downturn in the property market and completions expected to be lower than previous years, we could see an interesting opportunity present itself for homeowners as lenders try to grab a share of the limited market space when attracting and retaining new business.’