Mortgage price war ramps up as Sunak prepares to claim inflation victory

Britain’s biggest mortgage lenders are ramping up a pre-Christmas price war amid expectations that Rishi Sunak has on Wednesday met a pledge to halve inflation.

Major high street banks including Halifax and HSBC announced fresh cuts to fixed-rate mortgage deals on Tuesday as brokers said they expected further reductions in the coming days.

Official figures are expected to show inflation fell at the sharpest pace in three decades in October after a drop in gas and electricity bills last month.

Prices, as measured by the consumer prices index (CPI), are expected to have climbed by 4.7pc in the year to October, from 6.7pc in September.

This would also mean the Prime Minister has delivered on his pledge to halve inflation, which stood at more than 10pc at the start of this year.

It would also represent the biggest drop since 1992 and if confirmed would mean inflation has dropped to a two-year low.

Nationwide, NatWest and TSB slashed their mortgage rates last week amid bets that interest rates will start falling from their current level of 5.25pc next year.

Interest rate swaps, which reflect bets on future interest rates and are used to price mortgage deals, fell sharply after the Bank of England’s chief economist suggested the cost of borrowing could start falling next summer.

Huw Pill became the first policymaker to suggest that interest rates could fall halfway through next year, prompting two-year gilt yields to fall to a five-month low.

Mr Pill warned on Tuesday that pay growth remained too high to be consistent with its 2pc inflation target. However, borrowing costs continued to fall, with five year swap rates dropping to a six-month low of 4.12pc on Tuesday.  

Nicholas Mendes at broker John Charcol said he expected lenders to continue to slash rates ahead of Christmas.

“The market is seeing inflation coming down and believes we will see no further interest rate rises. There’s real enthusiasm in the market at the moment so we will probably see three weeks of frequent repricing from lenders.”

Mr Mendes said high street banks were keen to win new business and break a trend of borrowers sticking with their current lender.

Borrowing costs soared this summer amid fears that the Bank of England had failed to get a grip on inflation, which stopped many families shopping around, he said.

“We’ll see heavy repricing,” said Mr Mendes. “Lenders had been focusing on retaining as much remortgage business as possible. But now they’re making up for lost time and fill their buckets to try to end the year on a high.”

Halifax, which is part of Lloyds Banking Group, Britain’s biggest lender, said it was cutting its mortgage rates by up to 0.46 percentage points from Wednesday.

This includes cutting a five-year fix for borrowers with a 10pc deposit by 0.24 percentage points to just under 5pc. Five-year mortgage deals for borrowers with a 40pc deposit will be reduced by 0.20 percentage points, to 4.53pc.

HSBC announced the second wave of rate cuts in a week, while the bank’s subsidiary First Direct said it was implementing the biggest round of mortgage rate cuts since February as it also launched two new mortgages for borrowers with a 5pc deposit.

Mr Mendes added that a number of mortgage lenders had started to offer terms of up to 40 years this summer to help borrowers to ensure their repayments remained affordable.

Bank of England policymakers warned this month that inflation could tick up to 5pc in January as the ongoing war in the Middle East between Israel and Hamas has pushed up gas prices.

However, Philip Shaw, an economist at Investec, said a big drop on Wednesday could nevertheless signal a major turning point in the fight against inflation.

“We would not underestimate the psychological effect on both policymakers and markets of a materially lower rate of inflation,” he said. 

Despite the optimism, analysts have also warned that another of Mr Sunak’s targets to grow the economy is now at risk after Britain stagnated in the three months to the end of September.

George Buckley, chief UK economist at Nomura, said Mr Sunak and Chancellor Jeremy Hunt were likely to be confronted by a deteriorating economic backdrop at the Autumn Statement next week.

The Office for Budget Responsibility (OBR), the government’s tax and spending watchdog, is expected to slash its forecast for UK growth next year to below 1pc, from a current projection of 1.8pc.

Mr Buckley said: “The Chancellor will have two encouraging bits of news to share – not only better borrowing outturns but inflation prints too, with Tuesday’s inflation reading likely to fall below 5pc and thereby meeting a promise to halve inflation by year-end. However, a weaker growth outlook, alongside higher debt interest payments (due to higher inflation and interest rates) may cloud the fiscal picture looking further ahead.

In short, while a small fiscal buffer has been built up in recent months, that may be needed as and when the finances turn sour.”