The average mortgage rate is the lowest in nearly seven months

The average interest rate on a two-year fixed mortgage fell to its lowest level in nearly seven months as lenders vie for custom.

Financial information service Moneyfacts said the average interest rate fell from 5.92% to 5.87% in one day.

Major lenders, such as Halifax and HSBC, started the year with interest rate cuts to retain customers, while lowering their funding costs.

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

“The mortgage market may be heating up, but that won't fully ease the pain of the nearly 1.6 million existing borrowers who have cheap fixed-rate deals expiring this year,” said Alice Hine, personal finance analyst from Bestinvest.

“They still face a big jump in interest payments when they switch to a new product, with the only consolation being that the situation could have been much worse.”

Mortgage rates will still be higher than many people are accustomed to due to the big changes that have occurred over the past couple of 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 is very expensive — with an average rate of more than 8%.

Other companies have followed suit, including TSB, First Direct and NatWest, which will be selling some products on Friday, with more cuts expected to join them – although not all products will see such big drops.

These changes have actually fueled average prices, as calculated by Moneyfacts. The average two-year fixed rate and five-year fixed rate reached their lowest levels since June.

Richard Fearon, chief executive of Leeds Building Society, told the BBC's Today programme: “The mortgage price war has become very clear this week. There's always a slowdown at Christmas, but we've seen the market come back strong which is really great.” Competitive. Interest rates have fallen a percentage point or so since their peak.

Halifax said on Friday that house prices rose for the third month in a row to an average of £287,105 in December, but said it expected prices to fall this year with buyers likely to become more cautious due to economic uncertainty.

Kim Kinnaird, director of Halifax Mortgage, noted that last month's growth was likely driven by “a lack of properties on the market, rather than strong buyer demand.”

She added that with mortgage rates easing, “we may see an increase in buyer confidence over the coming months.”

While Halifax is the UK's largest bank, its figures only take into account buyers with mortgages – around two-thirds of all sales – and do not include those buying homes with cash or buy-to-let deals.

While Halifax mortgage approval data showed house prices ended last year 1.7% higher than in 2022, Nationwide recently said its data suggests prices ended the year 1.8% lower.

While both lenders expect slight declines in home prices in 2024, there is a generally mixed view among experts.

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

Home purchase approvals rose from 47,900 in October to 50,100 in November. For remortgages with a different lender, the total rose from 24,000 in October to 27,000 in November.

Guy Gittins, chief executive of Foxton, London's largest estate agent, told the BBC's Today programme, there was a “huge movement in confidence” late last year with more new buyers registered than at the same time in 2023. “I think… Prices will rise.” “What we are making at the moment in the UK is relatively flat, but what we will see is more movement in the market and many other transactions,” he added.

But Emily Williams, research director at real estate firm Savills, noted: “Mortgage lending for home transactions rose slightly month-on-month in November, but remained down 26% versus the normal level of activity before the pandemic.”

“Buyers who don't have to move continue to postpone while the cost of debt remains high. Looking to the future, there are encouraging signs for mortgaged buyers.”

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

Investment bank Goldman Sachs expects interest rate cuts to begin in May.

Such a move may also ease pressure on costs for mortgaged property owners, and ultimately slow the rate of rent increases for tenants.

However, this will be bad news for savers, as analysts point out that the rate of return on savings has now peaked.