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Borrowers can secure a cheaper mortgage over two years than five for the first time since former prime minister Liz Truss’s “mini” Budget, as traders bet that interest rates will gradually fall in the near term.
Last week, the average interest rate for a two-year fixed mortgage was 5 per cent, compared with the 5.01 per cent charged to housebuyers for a five-year mortgage, according to the data website Moneyfacts.
“What it means essentially is that money markets expect there to be a further dip in interest rates in the short term, but the long run base rate is likely to return [to] 4 per cent or so,” said Pete Dockar, chief commercial officer of the small lender Generation Home.
“For consumers, that means a shorter-term mortgage is once again cheaper than a five year- and that has been the historical norm.”
The shift came as the Bank of England announced a cut in the base interest rate by 0.25 percentage points to 4 per cent. Despite an increase in inflation, the bank has been cutting rates, amid flatlining economic growth.
One high street bank with a large mortgage book said that the inversion was a sign that markets expect rates to fall gradually rather than rapidly.
Rachel Springall of Moneyfacts said: “That future expectation of loads more rate cuts isn’t really there right now.”
The change will be good news for borrowers whose fixed-term mortgages are set to expire. The incentive now, for many borrowers, will be to sign up for a shorter-term mortgage. It will also be felt immediately by borrowers on a variable deal, whose mortgage costs are correlated to the base rate.
Dockar added: “The question for consumers now is do you go for a short-term rate which is a bit cheaper or do you lock in for the long term but pay a premium for it.”
Historically, longer-term mortgages typically cost more — borrowers expect to pay a premium to lock in certainty over an interest rate and banks take on more credit risk. However, this trend was bucked after the “mini” Budget in September 2022. Then, Kwasi Kwarteng as chancellor announced large spending increases and tax cuts which made interest rates soar.
A figure at one high street bank said they were not anticipating a hit to margins from the changes, “it makes very little difference in terms of profitability. Banks make a margin on mortgages based on the customer rate minus the cost of funding the product. The customer rate is determined by that cost of funding — so the trends in both two years and five-year rates mirror how much those loans are costing.”
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