Why lenders are cutting mortgage rates

A fresh wave of mortgage repricing is sweeping the high street, with major lenders trimming fixed rates one after another. Brokers believe the cuts are being powered by a mix of cheaper funding and intense competition for business in a subdued purchase market, rather than a sudden surge of optimism about housing demand.

Nicholas Mendes (pictured top left), mortgage technical manager at John Charcol, said the current phase fell short of a full-scale rate war but was clearly moving in that direction in certain segments. “It is not a full-blown rate war yet, but it is starting to look like the early stages of one,”he said. “Lenders are moving in quick succession and responding to each other, particularly in the most competitive and straightforward parts of the market.”

For some brokers, the pattern of near-continuous repricing between the high-street lenders now carries all the usual hallmarks. Aaron Strutt (pictured top right), product and communications director at Trinity Financial, noted that some in the industry dislike the term, but the reality on sourcing systems looks familiar.

“Lots of brokers in the industry do not like the term ‘rate war’ but when the lenders are constantly undercutting each other, it probably is a rate war,” Strutt said. “We expected to start this year with the lenders cutting their rates and making them more attractive to borrowers, and that’s exactly what is happening.”

Competition doing the ‘heavy lifting’

Both brokers pointed to supportive funding conditions, but said that competitive pressure and the need to protect volumes in a tough housing market were now driving much of the activity.

Mendes said price cuts were not solely a reflection of lower funding costs or a sharply more optimistic outlook for Bank Rate. “Funding conditions have been supportive, but competition is doing a lot of the heavy lifting,” he said. “The pace and sequencing of these cuts feel as much about grabbing market share and protecting flow as it does about pure cost movement.”

He also stressed the operational element, with lenders reluctant to be left behind when a rival moves. “When one lender sharpens pricing, others either respond or risk being parked on the sidelines, and that matters in a market where pipelines and service levels are being managed carefully,” Mendes said.

Strutt highlighted how sourcing systems amplify that dynamic, forcing lenders to remain visible at the top of the rate tables if they want to capture broker business. “They are being driven by cheaper funding costs and the sheer level of competition particularly as the market is so reliant on the sourcing systems now that lenders have to be further up the lists to get the business from many brokers,” he said.

“Thankfully, the lenders are keen to issue more mortgages again and with the challenging market we are in at the minute, especially with the purchase market, they need to work harder.”

Refinancers and low LTV borrowers still in pole position

For individual borrowers, the headline cuts may not appear transformative on their own. But brokers said the cumulative effect across multiple lenders and products was now feeding through into more meaningful savings and wider choice, especially for those refinancing from higher fixed rates.

“Reductions of 0.10 to 0.20 percentage points are not life-changing in isolation, but they do matter in practice when they occur across multiple lenders and products,” Mendes said. “They widen choice and improve the best available starting point, which is particularly helpful for those refinancing off higher fixed rates.”

In line with past cycles, the most straightforward, low-risk borrowers are generally seeing the keenest pricing. “The borrowers who tend to benefit most are those with cleaner cases and lower loan-to-value ratios, because that is where lenders compete hardest,” Mendes added. He noted, however, that some recent changes had gone beyond those narrow bands, citing HSBC’s latest reprice. 

Strutt agreed that the impact of repeated, incremental cuts was now material for many borrowers’ monthly budgets. “When a lender cuts a few basis points, then it doesn’t make a huge amount of difference, but these price reductions are adding up now so many more borrowers are able to secure lower rates and have much more manageable monthly repayments,” he said. “Home buyers with larger deposits and higher earners are still getting the best rates but the price gap for all different borrowers types with varying deposit sizes is generally pretty minimal now.”

Purchase market lags as remortgage volumes dominate

Despite the more competitive stance, brokers were cautious about interpreting the current moves as a sign of confidence in a strong rebound in purchase activity.

Mendes said the pricing shift looked more like a bid to hold ground in a subdued market than a bet on a rapid upturn. “It suggests lenders want to be positioned for a steadier market rather than waiting for a clear rebound,” he said.

“This does not feel like lenders are assuming demand will suddenly surge. It looks more like a push to protect volumes, continue to be competitive, and be the lender that borrowers and brokers see when activity improves.”

Strutt underlined the drag from wider economic uncertainty and tax and transaction costs on new purchase business, set against a strong pipeline of refinancing. “There is still a lot of economic uncertainty and with stamp duty being so high and landlords paying more tax, there is not as much property purchase business around,” he said.

“The remortgage market is massive this year, so it is a surprise some of the lenders are still making their purchase rates more expensive than their remortgage deals.”

At the same time, affordability dynamics are shifting as lenders push for growth. “With so many lenders still increasing their income multiples and offering cheap rates, this has to be classed as a great time and opportunity for many people to get on the property ladder,” Strutt said.

Swaps, inflation and policy in focus

Both brokers said they would be watching macroeconomic data and market rates closely to judge whether the current phase of cuts can be sustained, or whether it proves a short-lived push to gain share.

Mendes said the stability of swap rates would be a key test, alongside the breadth of any further repricing. “I would watch whether swap rates remain consistently supportive rather than just dipping for a short period,” he said. “I would also watch whether cuts broaden beyond the headline bands into higher loan-to-value products, fee-saver options, and a wider spread of borrower types.”

He added that official data and central bank communications would remain central to the outlook for funding costs and, in turn, mortgage pricing. “On the macro side, I would keep a close eye on key ONS releases, particularly inflation and wage data, because that is what ultimately anchors the interest rate outlook,” Mendes said. “I would also watch MPC voting behaviour and the tone of the minutes and decision statement because shifts in language or a change in the voting split can move markets quickly.”

Fiscal policy could also become a swing factor through gilt yields and broader market sentiment. “Finally, government fiscal policy matters,” he said. “Budget decisions and any material changes in tax and spending plans can influence gilt markets and market confidence, which then filters into funding costs and swap rates.”

Even with swaps supportive and competition strong, Mendes did not expect a return to the ultra-low rates of recent years. “Even if rates continue to edge down, my expectation is that further falls are more likely to be marginal than dramatic from here,” he said.

Strutt pointed to a familiar list of indicators that brokers and lenders alike will be tracking. “Swap rates, inflation, unemployment figures and economic growth figures are clearly really important when it comes to the mortgage industry and the potential direction for fixed rates,” he said.

“There are so many rate change emails at the moment, brokers have to work hard to keep making sure their clients get the best deals and that they keep up with their compliance.”

Advice for borrowers coming to the end of fixes

Against this backdrop of fast-moving pricing, Mendes warned borrowers nearing the end of fixed rates against trying to time the exact bottom of the market. “For anyone coming off a fixed rate in the next six months, I would not delay,” he said.

“In most cases, it is better to secure something now and then switch down if pricing improves before completion than to try to time the bottom and risk losing options or drifting onto a higher reversion rate.”

He added that careful broker support would be important in ensuring clients captured any further reductions before completion. “A good broker can manage that process end-to-end and make sure borrowers benefit from any further reductions that appear before they complete,” Mendes said.

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