Banks Lower Mortgage Rates: Harbingers of Further Rate Cuts?

Virgin Money has lowered the interest rates for both residential and buy-to-let mortgages by up to 0.2 percentage points, bringing them to a minimum of 3.99 percent. Halifax followed suit, reducing rates for first-time buyers and movers by up to 0.09 percentage points. Earlier this week, Santander became the first bank to offer a two-year fixed-rate mortgage at below four percent, with a rate of 3.99 percent for loans with a loan-to-value ratio of 60 percent. These interest rate reductions come just before the Bank of England’s Monetary Policy Committee decision on the future base rate. It is expected that the committee will maintain the rate at 5 percent, following a reduction last month, the first in four years. Prior to this, a series of increases had driven the rate up to 5.25 percent. Market participants anticipate at least two more rate cuts by the end of the year, which could lower the base rate to 4.5 percent. According to Rachel Springall of the analysis firm Moneyfacts, expectations for another rate reduction are mixed, but it is more likely that the next cut will occur in November after the budget announcement on October 30. Since last month’s rate cut, the average standard variable rate has fallen below 8 percent for the first time since August 2023, according to Moneyfacts, from 8.18 percent in March to currently below 8 percent. Similarly, the average rates for two- and five-year loans have decreased from 5.76 percent and 5.34 percent in March to 5.56 percent and 5.2 percent, respectively. For a ten-year fixed-rate mortgage, the rates dropped from nearly 6 percent to 5.63 percent. The wave of rate cuts followed a decision by the US Federal Reserve, which lowered its base rate by half a percentage point for the first time in four years. The Federal Reserve’s “Dot Plot” indicates that further cuts of another half percentage point are possible by year-end. These would occur after the US election on November 5, which will see a decision between Democratic candidate Kamala Harris and former President Donald Trump. In the UK, inflation remained at 2.2 percent in August, according to the Office for National Statistics, close to the target rate of 2 percent. This rate stayed unchanged from July, despite a significant increase in airfares in Europe, which could have raised the rate.