Banks and building societies will cut the costs of UK fixed-rate mortgages after financial markets pared back their expectations of future rises in the Bank of England’s main interest rate, brokers and lenders have predicted.

Mortgage brokers said the current high costs of fixed rates were set when markets had expected aggressive future rises in the base rate to counter soaring inflation, but those expectations had already subsided before the BoE signalled a more dovish outlook for interest rates in the wake of its latest base rate rise on Thursday.

Simon Gammon, managing partner at mortgage broker Knight Frank Finance, said: “We are expecting fixed rates to continue to fall back slightly — they are still overpriced because lenders don’t have an appetite for a lot of fixed-term lending right now, but with a period of stability, you can expect that to change.”

David Hollingworth, director at L&C Mortgages, said: “Lenders could see their way to dropping fixed rates back a little bit. There’s more scope for them to do that.”

The MPC on Thursday raised base rates sharply by 0.75 percentage points to 3 per cent, but BoE governor Andrew Bailey suggested markets had overcooked their predictions of future rises, which influence the pricing of home loans, and said lenders needed to reflect this in their mortgage pricing.

“[The Bank rate] will have to go up by less than currently priced into financial markets,” Bailey said in comments after the announcement. “That is important because, for instance, it means that the rates on new fixed-term mortgages should not need to rise as they have done.” 

Lenders said fixed-rate mortgage costs would come down, but warned it would take time. One senior banking executive said: “I think the most likely thing is that we see longer-term interest rates moderate. In time it will hopefully bring mortgage interest rates down a bit — but it will take a while for it to filter through and for expectations to shift.”

Another executive at a major UK lender suggested fixed mortgage rates of 1 or 2 per cent, which they were last year, were a thing of the past. “We expect in a few weeks and months to see fixed rates start to drop but almost certainly consumers will be getting rates higher than those they locked in at previously,” the person said

Lenders’ funding costs for their fixed-term mortgages are influenced by swap rates, which rocketed on September 23, when the “mini” Budget of Liz Truss’s government spooked markets and pushed up government borrowing rates.

Two-year swap rates have subsequently fallen below their 4.5 per cent rate on the eve of the “mini” Budget, as markets have welcomed the decision of new prime minister Rishi Sunak and chancellor Jeremy Hunt to reverse most of its measures.

But while swap rates and interest rate expectations have calmed, mortgage lenders have so far made only small reductions in their headline rates.

“People who are now in the process of getting new fixed-rate mortgages or rolling over should obviously get those terms,” Bailey said.

In July, the BoE said that 40 per cent of fixed-rate mortgages would expire in 2022 or 2023.

Two-year fixed mortgages peaked at an average 6.65 per cent on October 20, according to finance site Moneyfacts, compared with 4.74 per cent before the September fiscal announcement. The average rate for a two-year fixed deal had crept down to 6.46 per cent on Thursday.

Average five-year fixed rates stood at 4.75 per cent on the eve of the “mini” Budget. They rose to 6.51 per cent on October 20 and fell back to 6.3 per cent by Thursday.

While those on a fixed-rate mortgage are protected from fluctuations in the base rate for the term of their fix, those on variable rates including tracker, discounted variable or standard variable rates, face a more direct effect from Thursday’s rate rise, which was the biggest in 30 years.

Lenders’ standard variable rates, which tend to reflect changes in the BoE base rate, have risen to 6.49 per cent from a typical 3.59 per cent in December 2021, when the BoE embarked on a series of rate rises, according to L&C Mortgages.

If lenders eventually pass on Thursday’s rise to their standard variable-rate borrowers, it would mean an extra £5,076 in extra annual mortgage payments for someone with a £250,000 mortgage compared with early December last year, the broker calculated.