Mortgage rates reach record lows as prospect of Bank Rate increase diminishes

  • Two and three-year fixed mortgage rates fall to all-time lows of 2.54% and 2.92%
  • Typical five-year fixed rate remains near rock-bottom
  • Borrowers are paying up to £600 less each year compared to February 2015
  • Consumers able to choose from highest number of mortgage products since March 2008

Average rates for two and three-year fixed mortgage deals fell to record lows in February as consumers enjoyed the widest choice of products since 2008, according to the National Mortgage Index from Mortgage Advice Bureau – the UK’s best known broker brand.

Analysis of Moneyfacts Average Mortgage Rate™ data shows the average two-year fixed rate mortgage fell to 2.54% in February, down by 2 basis points (bps) since January (2.56%). Meanwhile the average three-year fixed rate mortgage rate fell to less than 3 per cent (2.92%) for the first time, down by 9bps from 3.01% over the same period.

Average five-year fixed rate deals also declined by 2bps between January (3.27%) and February 2016 (3.25%) – and now stand just 1bp higher than August 2015’s record low of 3.24%.  In contrast, two year tracker rates have risen for three consecutive months, although they remain lower than in February 2015 (2.11%).

These monthly falls in fixed rates are the latest in a downward trend that shows little sign of stopping, with rates falling substantially over the past 12 months. Typical two-year fixed rate mortgages have seen the biggest price cut, falling by 60bps from 3.14% in February 2015, while three-year fixed rates have fallen by 45bps from 3.37%. Average five-year fixed rates have fallen also fallen by 45bps from 3.70% in February 2015.

Table 1: Falling rates provide customers with monthly savings

Product Average rate, Feb 2015 Monthly payment, Feb 2015 Average rate, Feb 2016 Monthly payment, Feb 2016 Monthly saving
2-year fixed 3.14% £819 2.54% £766 £53
3-year fixed 3.37% £839 2.92% £799 £40
5-year fixed 3.70% £869 3.25% £829 £40

As the above table shows, borrowers fixing their rates in February 2016 stood to make significant savings compared to those who did so a year earlier. A borrower who took out a two-year fixed rate in February 2016 will be paying £53 less a month on average in mortgage repayments compared to a year earlier, equating to an annual saving of £636. Borrowers with a three or five-year fixed mortgage are now paying £40 less a month – or £480 less annually – compared to February 2015.

According to the Bank of England’s latest Mortgage Lenders & Administrators Return (MLAR) statistics, the average interest rate on gross advances stood at 2.81% in the fourth quarter of 2015 – the lowest since the data series began in 2007*.

*Source: rates are from Moneyfacts Average Mortgage Rate™. Calculations are based on a 25 year mortgage term for the average £170,026 loan (recorded in February 2016).  

With the Bank of England unlikely to raise the base rate anytime soon following the Monetary Policy Committee’s unanimous decision to keep it at 0.5% for an 84th consecutive month**, low  rates look set to be a feature of the marketplace for some time – playing favourably into the hands of consumers looking to secure an attractive mortgage deal.

Chart 1: Fixed mortgage rates continue to slide


Brian Murphy, head of lending at Mortgage Advice Bureau, comments:

“Falling rates are helping to ease the impact of rising house prices on borrowers. Over the past 12 months fixed rates have fallen steadily, meaning borrowers taking out a mortgage today can benefit from lower monthly repayments.

“This is not only good news for prospective homebuyers: existing homeowners can look to take advantage of these low rates by remortgaging to a much better deal, particularly if they are on a poor value standard variable rate (SVR).”

“Given the current outlook, low mortgage rates look set to stay on the menu for some time. There is an appetite among lenders for business, and consumers are in a good position to reap the benefits of increased competition.”

Product numbers continue to grow as competition between lenders intensifies

The Index also shows that consumers are continuing to benefit from a widening selection of products. The total number of mortgage products rose by 3% in February to 17,654 – a substantial annual increase of 36% from 12,940 in February 2015. This is the 13th successive month in which the Index recorded an increase in the total number of products, surpassing January’s total of 17,132.

The number of products sold via intermediaries increased by 3% from 12,180 in January to a post-recession high of 12,499 in February – the most since September 2008. This is an increase of 43% (or 3,731 products) from a year earlier, and maintains the intermediary channel’s share of mortgage products at 71% for the seventh month in a row.

There was also a monthly increase of 4% in the number of direct-only mortgage products during February, taking the total available to 5,145. However, direct-only mortgage products have risen by a far smaller proportion annually (24% – or 982 products).

Brian Murphy, head of lending at Mortgage Advice Bureau, comments:

“The number of mortgage products available to consumers has grown exponentially over the past 12 months. Competition between lenders is now hotting up ahead of the spring bounce in market activity. This is good news for prospective borrowers, as they are able to choose from a greater range of products tailored to their individual needs.”

“Intermediaries’ share of product distribution remained above the 70% mark in February, reflecting the increasingly important role that brokers play in today’s mortgage market. It can be difficult for prospective borrowers to navigate an increasingly complex and diverse mortgage market, and post-Mortgage Market Review (MMR) applications can be time-consuming. Many will find intermediaries are better positioned to meet their needs, as they can provide unbiased recommendations and have access to a huge number of products.”