UK lenders bet on inflation falling with mortgage rate cuts

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More than a dozen UK banks and building societies are set to reduce rates on fixed mortgage deals this week, reflecting market expectations that inflation is falling.

But brokers are not predicting dramatic price cuts, with the Bank of England forecast to raise interest rates later in the year after figures on Tuesday showed wages were growing at a record level.

“Consumers shouldn’t get into the habit of expecting a rate reduction every week,” Nicholas Mendes, manager at broker John Charcol, warned. “I expect we’ll see a period where price cuts slow down before we see more lenders do more.”

Barclays, Nottingham Building Society and Yorkshire Building Society dropped rates by as much as 0.61 percentage points on residential fixed rate mortgages on Tuesday, following news that Santander would trim offers by up to 0.29 percentage points

This is the fourth consecutive week that lenders have dropped mortgage prices, after inflation fell to a 15-month low in June.

Mortgage providers base their prices on the swaps market that reflects expectations for future interest rates, which are forecast to rise next month.

Mendes said swaps had risen off the back of record wage growth in the period from April to June, which reinforced central bank concerns over the pressures fuelling inflation.

Swaps markets are now pricing in that UK interest rates will peak at close to 6 per cent by the end of the year, having fully priced in a peak of 6.5 per cent in early July.

Economists polled by Reuters forecast that data due on Wednesday will signal a sharp slowdown in the rate of consumer price rises, from 7.9 per cent in June to 6.8 per cent in July.

NatWest, which reduced its rates on Friday, is set to lower them further by as much as 0.45 percentage points on Wednesday, alongside Yorkshire Building Society’s Accord Mortgages.

Mortgage lender Platform, part of the Co-operative Bank, also said it would reduce fixed-rate costs by as much as 0.29 percentage points from Thursday.

“We have waited for quite some time for the lenders to start lowering their rates, and the improvements are getting more frequent,” said Aaron Strutt, a director at broker Trinity Financial.

A slowdown in the mortgage market has forced providers to cut their prices to compete for business, as borrowers have had to limit spending in the face of a difficult economic environment. The issue was raised in results calls by chief financial officers of both Lloyds and NatWest last month.

Brokers warned off lenders undercutting each other. “If they did that, providers could cause a flurry of new buyers and push house prices up,” said Kylie-Ann Gatecliffe, director of broker KAG Financial. “They have to dip their toes in very carefully.”

But despite the recent reduction in mortgage costs, borrowers are still facing higher rates than a year ago.

The average cost of a two-year fixed mortgage is 6.79 per cent, according to Moneyfacts, down slightly from a 15-year peak in early August.

“Most homeowners and buyers need rates to be at a more of an affordable level before they regain their financial confidence,” said Strutt.