Average mortgage rate lowest for nearly seven months

The average rate on a two-year fixed mortgage has fallen to its lowest level for nearly seven months as lenders compete for custom.

Financial information service Moneyfacts said the average rate had fallen from 5.92% to 5.87% in a day.

Major lenders, such as the Halifax and HSBC, have begun the year with rate cuts to keep hold of customers, as their own funding costs have dropped.

More reductions are expected, but many homeowners still face rising bills.

"The mortgage market may be heating up, but this won't fully ease the pain for the roughly 1.6 million existing borrowers with cheap fixed rate deals expiring this year," said Alice Haine, personal finance analyst from Bestinvest.

"They still face a heavy jump in interest payments when they switch onto a new product, with the only comfort that the situation could have been much worse."

Mortgage rates will remain higher than many people have been accustomed to because of significant changes over the past two years.

The interest rate on a fixed mortgage does not change until the deal expires, usually after two or five years, and a new one is chosen to replace it. Doing nothing would leave people on a variable rate, which are very expensive - with an average rate of more than 8%.

However, the UK's biggest lender, the Halifax, started the year by reducing the rate on some of its mortgage products by nearly one percentage point.

Others have followed suit such as TSB which will make cuts to some products on Friday, and more are expected to join them with reductions - although not every product will see such large falls.

These changes have already fed through to the average rates, as calculated by Moneyfacts. Both the average two-year fixed rate and five-year fixed rate are at their lowest level since June.

Richard Fearon, chief executive at Leeds Building Society, told the BBC's Today programme: "This mortgage price war has become very visible this week. There is always a Christmas slowdown, but we've seen the market come back with a bang and it's really competitive. Rates are down one percentage point or so since their peak."

Separate figures from the Bank of England published on Thursday show that the number of mortgage approvals rose slightly in November, which is seen as a sign of a touch more confidence from buyers.

Approvals for house purchases were up from 47,900 in October to 50,100 in November. For remortgaging with a different lender, the total increased from 24,000 in October to 27,000 in November.

Emily Williams, director of research at Savills estate agent, said: "Mortgage lending for house transactions rose slightly month-on-month in November, but were still down 26% against the pre-pandemic normal level of activity.

"Buyers who do not have to move are continuing to hold off while the cost of debt remains high. Looking ahead, there are encouraging signs for mortgaged buyers."

That encouragement depends on whether economists are correct in their prediction that the Bank of England's benchmark interest rate will fall relatively soon.

Investment bank Goldman Sachs is predicting that interest rate cuts will start in May.

Such a move may also ease the pressure on costs for mortgaged landlords and, eventually, in turn slow the rate of rent rises for tenants.

However, it will be bad news for savers, with analysts suggesting the rate of return on savings has now peaked.