Contractors, UK mortgage rates just fell to sub-4%, but is July 2024’s downward trend set to continue?

For the first time in many quite gruelling months for those in the contractor mortgage market, the first sub-4% mortgage is here, in the fourth week of July 2024, writes John Yerou, CEO of Freelancer Financials.

Thanks to the Nationwide, a heck of a drop is here…

The offering, from the Nationwide, tallies with the downward mortgage rate trend we’ve seen since the beginning of the month, which has seen home loan deals get more and more attractive.

But this five-year fixed, 3.99% deal from Britain’s biggest building society is a heck of drop from the national average mortgage rates.

Here, exclusively for ContractorUK, I’ll look at the conditions of the product itself, the market that has permitted this drop to come about, and whether these low, sub-4% home loans are sustainable.

Yes, it’s a 3.99% deal – but for only a tiny percentage of contractors moving home

At the beginning of July 2024, the average two and five-year fixed mortgages were 5.97% and 5.53% respectively. With many lenders offering gradual, smaller cuts, those averages have inched down to 5.81% and 5.41%.

The leap to sub-4% is definitely going against the grain, and has caused mixed reaction in the markets.

I’ll wrap those up later. But for now, here are the details and the background.

Origin story: where Nationwide's sub-4% mortgage comes from

Nationwide announced the new headline-grabbing mortgage deal on the 23rd with effect from the 24th.

It attracts a £1,499 fee, and the applicant – potentially you dear contractor -- must have 40% deposit/equity. So, a high hurdle. But unfortunately there’s more.

To qualify for the deal, you have to be a new Nationwide customer and a home-mover.

As a result, contractors who are first-time buyers and those looking to remortgage are frozen out of the deal.

In essence, the 3.99% deal is looking to:

• Attract the lowest-risk borrowers,
• Buy customers from other lenders,
• Make a splash with the headline-grabbing sub-4% rate itself.

So, no – Nationwide’s sub-4 per cent deal won’t inspire a mass popping of champagne corks just yet.

Do the markets support the drop?

In the background, two-year fixed rate swap rates are coming down, albeit slowly.

These are the rates upon which lenders base their own deals. But they’re not coming down a lot.

Lenders are hoping/gambling that we see at least one cut in the base rate by the Bank of England, either this month or next to prop up the lower rates they’ve been offering all month. But this is in no way guaranteed.

At the end of last year, it was forecast that there’d be five or six cuts to the base rate this year. We might now see only one from the BoE, two at a push.

Inflation update

Headline inflation is proving sticky at 2%, with some experts believing it may have bottomed out already.

Why? Well, wage growth and core service inflation are not coming down. If anything, the expectation is that headline inflation might yet rise slightly, further.

Such an inflation uptick could be disastrous for borrowers.

Lenders offering these lower rates would be wary of the BoE at least holding the base rate to tackle inflation. That’s not an environment likely to entice them to lower mortgage interest rates further.

Best mortgage deals: what’s the reality for contractors in the market for a home loan?

Based on our contractor mortgage search engine (for the very latest, hit the “Compare contractor mortgage rates” button on ContractorUK’s mortgage page), there’s a wide variation on rates, depending on the deposit you have.

For example, take remortgaging a home valued at £300,000 for 40%, 25% and 10% deposits on a repayment basis (as at 24 July, 2024).

If you have a 40% deposit, the best interest rates you can expect are around:

• 2-year fixed: 4.67%
• 5-year fixed: 4.30%

If you have a 25% deposit, the best interest rates you can expect are around:

• 2-year fixed: 4.70%
• 5-year fixed: 4.43%

If you have a 10% deposit, the best interest rates you can expect are around:

• 2-year fixed: 5.19%
• 5-year fixed: 4.94%

Our contractor-centric deals are much better than the current average mortgage rates.

But they are not sub-4%!

When will mortgage rates begin to start falling -- consistently?

If you’re one of the 1.5 million homeowners whose current mortgage deal matures this year, you have to act.

Don’t read too much into the sub-4% mortgage deal headlines. They are not the norm, and the markets can’t support them.

There are three key factors indirectly keeping costs high:

• The Israel/Gaza war (additional import costs);
• The Ukraine/Russia conflict (higher energy costs);
• Uncertainty of the outcome of the US Election, and subsequent relationships with China and Europe/Ukraine.

Final contractor mortgage recommendations

It would be folly for the Bank of England to reduce its base rate too much with markets exposed to so much volatility.

So, if you’re coming off a 2% deal, going up to a high-3% deal might feel better.

But those deals will be few and far between, and only for those with =>40% deposits. Don’t be tempted to wait until tomorrow; as the saying goes, 'Tomorrow Never Comes.'