Mortgage rates fall in sign Hunt has calmed markets

MORTGAGE rates have fallen for the first time since the start of September in an early sign that Jeremy Hunt’s miniBudget U-turn has calmed the market.

The average rate on a two-year fixedrate mortgage deal fell from 6.65 per cent on Thursday to 6.55 per cent on Friday, according to Moneyfacts, a data company.

This 0.1 percentage point drop in rates will reduce the cost of taking out a £200,000 loan by £200 per year. It was the first time the two-year rate has fallen on a daily basis since at least the start of September, excluding a far smaller drop on Wednesday.

The average rate on a five-year fixed deal also fell for the first time, dropping from 6.51 per cent to 6.43 per cent between Thursday and Friday. It means a buyer would pay £800 less in interest over the course of a five-year deal.

The dip reflects a decline in gilt yields and interest rate expectations, which both influence borrowing costs for banks, after the Chancellor reversed the vast majority of the policies in the miniBudget announced by his predecessor Kwasi Kwarteng.

Mr Kwarteng’s tax cuts triggered panic in financial markets and a mass withdrawal of mortgage deals. Mr Hunt scrapped almost all of the tax cuts in an announcement that helped to calm financial markets.

But this marginal day-to-day decline does not come close to erasing the huge jump in mortgage rates recorded since Mr Kwarteng’s announcement.

Two and five-year fixed-rate deals were still 38 per cent and 35 per cent higher than on Sept 23, when the miniBudget was announced.

The future trajectory of mortgage rates following Liz Truss’s resignation is unclear. Gilt yields – which influence borrowing costs for banks – fell initially after her resignation, but have since climbed back above 4 per cent owing to uncertainty over the new Tory leader.

High inflation, currently more than five times the Bank of England’s target rate, also means further increases in the Bank Rate are unavoidable.

Investors have priced in a peak in the Bank Rate at 5.25 per cent in June 2023. Any large drop in mortgage rates is therefore unlikely, even if the economic outlook becomes far more stable.