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Cheapest mortgage of 3.94% hits market, but will rates fall further?


Rates have dropped significantly since summer – with small lender Generation Home now leading the way

Lenders have continued to cut rates following a drop in inflation to 3.9 per cent in November (Photo: Isabel Infantes/Getty)

A new mortgage deal priced below 4 per cent has hit the market just before the new year, sparking hope rates could come down further in 2024.

Generation Home, a small lender, has today launched a five-year rate for 3.94 per cent for people with a 40 per cent deposit. This comes with a £999 fee, and is currently the cheapest rate on the market.

Despite the mortgage market usually getting quiet around Christmas time, lenders have continued to cut rates following a drop in inflation to 3.9 per cent in November.

The surprising drop in inflation was very good news for homeowners who could see mortgage deals drop even further in the coming weeks as a result, as pressure mounts on the Bank of England to cut interest rates.

Swap rates, a measure that indicates what the market thinks interest rates will be in future, fell by 0.2 points in just a few hours on both two and five-year fixed rates.

It comes following a tumultuous year for mortgage costs. At their highest average level, rates were 6.86 per cent for a two-year fix in July. Experts are predicting even more rates of below four per cent by early next year.

Any further changes will be affected by the base rate, which determines the rate at which the Bank of England lends to other banks. If it stays at 5.35 per cent of falls, which is is now predicted to do, as early as next March, it is likely that deals will also become better value.

David Hollingworth, associate director at L&C Mortgages, added: “Competition between lenders remains strong in a housing market with lower activity levels.

“As market expectation of the chance for the next move in base rate to be down has grown, lenders have passed through improvements in funding costs.

“Today’s news is likely to further that trend, which could soon see five-year fixed rates closing in on the four per cent marker.”

Lenders battle to lure customers as mortgage applications fall

Currently, an average two-year fix is 5.95 per cent and a five-year one is 5.55 per cent, according to the mortgage analytics firm Moneyfacts. However, much lower deals can be found.

Lenders started cutting rates towards the end of 2023 to lure more customers as the number of people applying for mortgages has fallen.

They will continue to make up for lost business in the new year, which could mean more criteria changes to try to soak up as much business as possible. For example, high-street lenders may try and take some of the business away from specialist lenders.

Chris Sykes of brokers Private Finance added: “While there is no crystal ball to determine what mortgage rates will be in 2024, it is looking increasingly likely that we have now passed the peaks of mortgage rates for the time being.”

Although not yet under 4 per cent, major lenders are offering cut-price deals, including Barclays, which earlier this week announced fixed-rate cuts of up to 0.43 percentage points. The cheapest rate it offers is now a five-year at 4.32 per cent, although it does come with a £1,999 product fee.

Halifax is offering a five-year fix at 4.28 per cent as of this week, down from 4.27 per cent.

Should rates stay (relatively) low, or fall further, first-time buyers are likely to benefit as lenders tend to offer cheaper purchase rates for new buyers than they do for those remortgaging.

Anyone on a standard variable rate, which tends to follow the base rate, are likely to find they are paying a similar rate to what they are already.

But for those on fixed rates about to end, although rates are coming down, they will still be likely find they are paying more than they were before, as thousands move off deals that were as low as one per cent.

Brokers suggest looking for a deal six months before your mortgage comes to an end, and locking in a new one. You will be able to change it nearer the time, if a better offer opens up, but will have one secured if rates increase again.

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