Mortgage rates ‘could fall under 3.5%’ in WEEKS after Bank of England cut

The decision followed stronger-than-expected inflation data, with the annual rate easing to 3.2 per cent in the twelve months to November.

Mortgage brokers said the move is likely to trigger a fresh wave of competition among lenders.

Industry figures said banks are expected to cut rates aggressively at the start of 2026 as they compete for new business.

It means brokers said mortgage deals priced below 3.5 per cent could emerge in the near term as financial markets are currently pricing in another Bank of England rate cut by May 2026.

However, expectations for further reductions later in the year have softened, with Chris Sykes, mortgage broker at MSP Financial, saying competition typically intensifies at the start of the year.

“There is likely to be somewhat of a rate war in January,” he said, “There often is quite competitive pricing in January and February as some lenders like to start the year strong.”

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Mr Sykes added: “So for those looking to buy in 2026, it is a good time to secure a rate”.

Simon Gammon, managing partner at Knight Frank Finance, said lenders have already begun cutting rates and deeper cuts could follow in the months ahead.

He continued: “Lenders have been trimming mortgage rates for several weeks, but Thursday’s decision adds momentum to what we expect to be a highly competitive January.

“With new lending targets in place, lenders are likely to undercut one another to win that early-year business”.

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He added: “It’s not impossible that we see two-year fixed rates below three per cent by spring”.

Data from Moneyfacts shows the average two-year fixed mortgage rate currently stands at 4.82 per cent.

However, brokers said wholesale funding costs indicate scope for further reductions as the two-year swap rate, which underpins fixed-rate mortgage pricing, is currently around 3.5 per cent.

The five-year swap rate is slightly higher at about 3.7 per cent but some lenders are already close to breaking below the 3.5 per cent mark.

Adrian Anderson, director at mortgage broker Anderson and Harris, said competitive deals are already available.

“Santander has a 3.51 per cent two-year fixed rate with a £1,999 product fee, so we are not far away from a sub 3.5 per cent rate already”.

Tracker mortgages – which move directly in line with the Bank of England rate – are also expected to become cheaper following the base rate cut.

As a result, reductions are passed on automatically to borrowers.

Halifax’s two-year tracker mortgage is priced at 0.11 percentage points above base rate and following the cut, its rate will fall from 4.11 per cent to 3.86 per cent.

For a borrower with a £200,000 mortgage over 25 years, this would reduce annual repayments by more than £330.

David Hollingworth, associate director at L&C Mortgages, said tracker deals are becoming more attractive.

He said: “Tracker rates have been gradually closing the gap on fixed-rate options but are still behind the best of the fixes.

“However, with more base rate cuts expected next year, we will potentially see more borrowers wondering if following rates down could make for a better option in the long run.”

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Economists at Deutsche Bank are forecasting two additional base rate cuts during 2026, with optimistic brokers saying lower borrowing costs could help revive housing market activity.

The Bank of England has estimated 3.9 million households will need to refinance over the next three years.

Many of these borrowers are coming off deals agreed when interest rates were below one per cent between 2010 and 2022.

Mr Fell said lower rates would be particularly significant for buyers in London and the South East.

Mark Harris, chief executive of mortgage broker SPF Private Clients, said the rate cut could support market confidence.

“This will provide a welcome shot in the arm for the housing market which suffered from pre-Budget speculation over property taxes that on the whole were not as bad as many feared.”