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Antony Antoniou – Luxury Property Expert

Mortgage Rates Set to Drop in January Sales

Mortgage Rates Set to Drop in January Sales

The new year looks set to kick off with a bang in the UK mortgage market, as lenders compete to offer the best rates since before the short-lived Truss administration. Lower inflation and falling swap rates are aligning to create the perfect conditions for a January mortgage sale.

Plummeting Inflation Boosts Market Confidence

The latest inflation figures from the Office for National Statistics (ONS) show that consumer prices rose by 3.9% in November, down from 4.6% in October. This is the lowest inflation rate in two years and comes as a welcome relief after hitting dizzying heights of 11.1% in October 2022.

The drop in inflation is an indication that the cost of living crisis may have passed its peak intensity. It also suggests that the Bank of England does not need to raise interest rates as aggressively in 2023 as previously expected. This has fed through to the swap rates that determine fixed rate mortgage pricing.

Five-year and two-year swap rates have both fallen by around 0.2 percentage points over the past day. As swap rates provide insight into where markets expect the Bank Rate to go in future, their decline hints that cuts to the benchmark interest rate could come sooner than forecast.

Greater confidence in the market and lower swap rates are combining to make lenders more willing to reduce their mortgage rates. The new year period always sees heightened competition between lenders for business, but with market fundamentals now looking more positive, the January 2023 mortgage sale could be even more significant than usual.

First Sub-4% Mortgage Rate Since Truss Era

Lender Generation Home has already thrown down the gauntlet by announcing it will launch the first sub-4% fixed rate mortgage since the disastrous mini-budget.

From December 15th, Generation Home will offer a five-year fixed rate deal at 3.94% for borrowers with a 40% deposit. This is part of a wider set of reductions across the lender’s product range.

Barclays has also cut selected fixed rates on residential and buy-to-let mortgages by up to 0.43 percentage points in response to the favourable conditions.

Industry insiders expect more lenders to follow suit with competitive new rates in January. Chris Sykes, Technical Director at broker Private Finance, comments:

“The fall in swaps will help instill confidence in lenders for the new year to offer mortgage rate reductions. A fall in average mortgage rates, particularly long-term rates, will help restore confidence in the housing market.”

Sykes believes five-year fixed rates could dip as low as 3-4% in the near term thanks to the market shifts.

January Sale to Tempt Frozen Property Market

The UK property market has slowed significantly in 2022. Residential transactions fell 17% year-on-year in October, leaving lenders with slack capacity.

Brokers anticipate firms will leverage the traditional January activity spike to rebuild their lending volumes. As Justin Moy, Managing Director of EHF Mortgages, puts it:

“We are all talking about a classic January sale situation. I think we are expecting lenders to reprice quickly. We think the sub-4% probably a 5 year deal will be with us near the end of the year.”

By dropping their rates decisively in January, lenders hope to attract borrowers who have been waiting on the sidelines for the right opportunity. This could provide a welcome boost to the flat housing market.

Relaxed Lending Criteria Also on The Cards

On top of lower interest rates, some lenders are tweaking their lending criteria to make it easier to secure a mortgage.

Last week, Nationwide shortened the minimum visa validity period required for mortgage applicants from two and a half years to one year. In October, it also increased the maximum loan-to-value and loan-to-income ratios available to self-employed borrowers.

Meanwhile, Barclays adjusted its income multiples in October to enable higher borrowing potential for some customers.

According to David Hollingworth of L&C mortgages:

“Quite often you get a rapid pace of reductions at the beginning of the year, so we could see a few better rates flying in January. I think we will see lenders be very aggressive in the new year.”

With inflation seemingly past its peak and market confidence restored, the stage is set for mortgage lenders to kick 2023 off to a strong start. All eyes are now on which firms can offer the most competitive rates and products in the January sales event.

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