Lenders cut mortgage rates as the fiscal outlook steadies

NatWest and Barclays trimmed rates across several mortgage products yesterday, following similar moves by Halifax, Santander, Nationwide and HSBC in the wake of last month's budget.

Whatever your views on government fiscal policy, the Chancellor has succeeded in stabilising the outlook, at least for the near-term. The Bank of England now estimates that the budget will knock off around 0.4 to 0.5 percentage points from the annual rate of inflation from around midway through next year, allowing the Bank to cushion the impact of higher taxes with lower borrowing costs. Since September, the yield on government bonds, or gilts, has fallen 0.2 percentage points more than the equivalent rates on debt in the United States and the eurozone, according to Institute for Public Policy Research data covered by the Times.

Average two- and five-year mortgage rates fell by 0.08% and 0.10% respectively in December compared to a month earlier, according to Moneyfacts. Rates of 4.86% and 4.91% are the lowest since before the mini-Budget in September 2022. Leading two-year fixed rates can be found as low as 3.55%, according to Knight Frank Finance. 

Growing market share

Falling mortgage rates have sustained robust levels of activity through 2025 despite considerable fiscal and economic uncertainty. The value of gross mortgage advances issued by lenders surged to £80.4 billion in Q3, up more than a fifth on the same period a year earlier, according to Bank of England figures published yesterday. Purchasing took up a 58.6% share of that activity, which is down 5.8% compared to last year. 

The value of new mortgage commitments – to be advanced over the coming months – also surged by a fifth. Encouragingly for first-time buyers, the share of advances with loan-to-value (LTV) ratios exceeding 90% rose to 7.4%, which is the highest since 2008. Arrears decreased by 2.9% to £20.6 billion, and were 5.8% lower than a year earlier.

First-time buyers constitute about half of UK mortgage-driven home purchasing activity so are a key focus for lenders seeking to grow market share. The number of deals at 95% LTV rose by 111 in December year-on-year, according to the Moneyfacts figures. Those at 90% LTV rose by 155. No other LTV tier has risen by more than 100 deals over the period. 

A divided BoE

Conditions are thankfully calmer than this time last year, when wage data had just unsettled markets and talk of a potential global trade war was reaching fever pitch. 

That said, there is still plenty to worry about – despite the improved outlook, inflation won't return to target until mid-2027, according to Bank of England forecasts. That's why the Monetary Policy Committee is likely to remain divided when it meets next week, even if investors put the odds of a cut at nearly 90%. 

"I am very worried that we are seeing more pressure on resources in the economy, and that obviously leads to price rises. I think you can see it in the labour market," BoE deputy governor for monetary policy Clare Lombardelli told parliament's Treasury Committee this week. "I am also perhaps less convinced than others about how restrictive monetary policy is at the moment, as in how far we are from reaching the end of the cutting cycle."

Following a likely cut next week, Capital Economics forecasts three further reductions in 2026, taking the base rate to 3% by Q4. Markets anticipate a more modest 50bps of easing and an end-year rate near 3.25% – for more forward looking economic indicators, see the latest Leading Indicators.

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