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Three of the UK’s largest lenders and several smaller players announced cuts to mortgage rates on Thursday after last week’s official data showed a better than expected drop in June inflation.
The moves by Nationwide, Barclays and TSB followed on from a decision by HSBC, which on Wednesday became the first big home loan provider to cut the cost of about 100 of its products in the wake of the inflation data.
Lenders reacted after last week’s figures led to a change in market expectations that the Bank of England was more likely to raise interest rates by a quarter rather than a half point next week.
“What’s opened the door to these improvements is the better than expected inflation figures,” said David Hollingworth, director at broker L&C Mortgages. “There’s been a consequent drop in swap rates [which banks use to price mortgages] as markets readjust their thinking around where the base rate needs to go.”
Although the base rate is at a 15-year high of 5 per cent, the bigger-than-expected drop in June inflation data has helped stabilise financial markets allowing banks to reduce funding costs.
But analysts said the reduction in the cost of home loans also reflected the impact of the slowing housing market triggered by the surge in mortgage rates in recent months as the BoE raised the base rate to tackle inflation.
“They’re all chasing a more limited demand, which will entice them to be competitive with rates they offer,” said Aneisha Beveridge, head of research at Hamptons International. “Of course, lenders will offer the best [deals] they can.” Both Lloyds and Barclays said this week that competition was squeezing the margins on mortgages.
Nationwide, the UK’s second-largest lender, said that it would reduce fixed rates by up to 0.35 per cent on Friday, while tracker products would come down by as much as 0.2 per cent.
Barclays, the fifth-biggest lender, is reducing rates by 0.15 percentage points, while TSB, the 10th-largest mortgage provider, announced it was reducing the cutting rates on two-year fixed products by as much as 0.55 per cent.
Some smaller lenders also cut mortgage rates on Thursday, including Foundation Home Loans and Skipton Building Society.
The sharp rise in mortgage rates in recent months has caused concern in government as higher home loan payments exacerbate the cost of living crisis.
Last month, the biggest banks and building societies signed up to a “mortgage charter” with chancellor Jeremy Hunt, which included various commitments such as waiting at least 12 months before repossessing the homes of borrowers who fall behind on payments.
Lenders have also come under pressure from MPs over the speed at which mortgage rates have risen compared to savings products.
Hollingworth said he expected the easing of mortgage rates to continue even after the expected rate increase by BoE next week, although he was cautious about how significant the reductions would be.
“I don’t think a rise [in the base rate] will stop the trend that we’re seeing,” he said. “But also these cuts don’t necessarily signal that mortgage prices will crash back towards 5 per cent, let alone the 4 per cent we saw earlier this year.”
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