According to Moneyfacts, the average rate for a two-year fixed mortgage, which was nearly 6% at the start of the month, has now dropped to 5.79%. The average five-year rate stands at 5.39%. Recently, Nationwide reduced its five-year fixed mortgage rates for new customers with a 40% deposit to 3.99%, plus a fee. Mortgage analyst Kylie-Ann Gatecliffe suggests this could signal the beginning of a ‘rate war’ among major banks.

The last time Nationwide, the UK’s largest building society, offered rates below 4% was in February. ‘Although this rate is currently available only for purchases, we hope the remortgage market will follow suit,’ said Sarah Tucker, founder of The Mortgage Mum.

Matt Smith from property portal Rightmove commented, ‘We’ve seen average mortgage rates drop at an unprecedented pace this week. The first sub-4% rate for those with larger deposits willing to pay a higher fee is grabbing headlines, but we’ve also seen significant rate reductions across other loan-to-value brackets, benefiting more mass-market movers.’

Despite these reductions, mortgage borrowing costs remain higher than they’ve been in a decade because lenders base their mortgage rates on the central bank’s rate, which is still at a 16-year high of 5.25%. However, some predict a rate cut at the central bank’s next meeting on 1 August due to falling inflation.

Central banks typically increase borrowing costs when inflation is high and decrease them when inflation is low or to stimulate a sluggish economy. Even with potential rate drops, many borrowers may continue to struggle with repayments.

Approximately 1.6 million existing borrowers will need to remortgage as their current fixed-rate deals expire, transitioning from rates below 2% to significantly higher repayments on their next home loans. Despite this, Ms. Tucker views Nationwide’s new rate as ‘a hugely positive sign for the mortgage market’ during a ‘turbulent time,’ as people grapple with high living costs and borrowing rates.

‘This is a fantastic sign of stability and lower interest rates ahead,’ she said, noting that the recent general election ‘has helped consumers and the market to feel more stable.’

Rachel Springall from Moneyfacts added, ‘Mortgage rates could fall further, but it’s challenging to predict how quickly and by what margins.’ She continued, ‘Those waiting for the Bank of England to cut the base rate may be hoping for August, but opinions among economists are divided, with many now expecting a cut in September at the earliest due to persistent service inflation.’