UK banks have unleashed a new mortgage price war, with major lenders slashing rates after HSBC offered new home loans under 4% for the first time since the pandemic.
HSBC is the first big high street bank to break the 4% barrier on mortgage rates, offering 10-year fixed rate deals at 3.99% via its First Direct and HSBC brands.
The moves spark hopes that falling mortgage rates could provide some relief to homeowners and homebuyers after a painful 18 months of rising borrowing costs.
HSBC cuts fixed rates below 4%
HSBC said it is launching a new 10-year fixed mortgage at 3.99% for amounts over £30,000 and with a 25% deposit via its First Direct brand. The same sub-4% deal is also being made available to HSBC customers.
The deals significantly undercut the previous cheapest 10-year fixes on the market. Before HSBC’s announcement, the lowest 10-year fix stood at 4.29%.
HSBC UK’s Michelle Andrews said:
“We want to support both new and existing customers with competitive mortgages in the current market. These product changes give buyers and re-mortgagers more options when it comes to choosing the right deal for their new home or remortgaging their current property.”
The new sub-4% mortgage rates from HSBC are almost half the level seen last October, when they peaked above 6.5%.
However, they remain higher than pre-pandemic levels in 2019 when 10-year fixed deals were below 2%.
Rivals expected to follow HSBC’s lead
Other major lenders are expected to respond with similar rate cuts after HSBC fired the starting gun on a new mortgage price war.
HSBC’s move will pile pressure on rivals to come forward with cheaper fixed rates after most lenders lifted pricing in recent months.
Anthony Codling from London brokerage Twentieth Century Capital commented:
“I expect other banks to jump on the bandwagon next week. Whileswap rates have been falling sharply – down 27% over the last month alone – mortgage pricing has until now lagged the market.”
He said HSBC’s price cut was “the catalyst the market has been waiting for,” predicting many lenders would respond with rate reductions early next week.
Halifax first to follow with cuts across LTVs
Halifax has responded swiftly, becoming the first big lender to match HSBC’s pricing with new deals below 4%.
The UK’s biggest mortgage lender unveiled new five-year fixed rates starting at 3.99% for borrowers able to put down a 40% deposit. It has also reduced rates across other deposit sizes.
Halifax’s Kim Kinnaird said:
“Reducing rates across higher LTV brackets, not just lower LTVs, is important for supporting first-time buyers or those climbing onto or up the property ladder. We have made reductions across our LTVs in recognition of this.”
Experts predict Halifax’s move will force other leading banks and building societies into action next week with a “landslide” of new deals.
Falling swap rates allow lenders to cut pricing
Mortgage lenders base their fixed rates pricing on interest rate swaps – instruments that let them lock into fixed costs for raising funding.
These swap rates have tumbled in recent weeks, giving lenders scope to cut new mortgage rates. The five-year sterling swap rate is now 3.67%, down from above 4.5% in October.
HSBC is passing these cheaper funding costs through to new mortgage customers. Rivals are likely to follow as they come under pressure to gain market share.
But analysts warned banks also need to balance profitability, meaning mortgage rates may only come down so far.
John Cronin from stockbroker Goodbody said lenders faced a tricky balancing act:
“Banks remain under political pressure to stimulate mortgage lending, yet higher credit spreads are required to support returns in an environment of weaker economic growth.”
What next for mortgage rates?
Mortgage pricing remains exceptionally volatile as lenders weigh up multiple factors pulling in different directions.
Cheaper funding is allowing rate cuts, providing some relief after 18 painful months of rising repayments.
But the outlook for the UK economy has darkened, especially as high inflation persists. Analysts increasingly expect the Bank of England to keep interest rates high for an extended period.
This challenging backdrop makes further big mortgage falls unlikely. While borrowers are enjoying lower fixed rates for now, pricing remains higher than pre-pandemic and susceptible to sudden reversals depending on new data or events.
Ruth Gregory at Capital Economics said:
“The fall in swap rates means that there is scope for fixed mortgage rates to edge down a little further but significant declines are unlikely until it looks like there are material cuts coming from the Bank of England.”
Borrowers urged caution amid volatile markets
Consumer experts urged buyers not to get “swept away” by the current price war in case rates jump higher again.
Martin Lewis from MoneySavingExpert.com warned:
“My best guess is mortgage rates will remain largely low for the next couple of years, but uncertainty abounds right now, so if you can secure a decent fixed rate yet handle rises, it’s not a bad safety net.”
Borrowers seeking to remortgage were advised to explore their options but avoid rushing decisions based on short-term fluctuations.
David Hollingworth from broker L&C Mortgages commented:
“Many borrowers are still sitting on low fixed rates so there is no need to panic remortgage. But those on standard variable rates should be exploring their options.”
With swap rates signalling cheaper funding costs for now, lenders are passing that on via competitive pricing. But the medium outlook remains clouded by high inflation and rate hike risks.
How long the current price war lasts depends on whether markets continue pushing down swap rates or if sentiment changes on UK economy worries.
Borrowers have a window to benefit from lower pricing but must balance locking into longer fixes against retaining flexibility if conditions improve.
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