Lenders drop mortgage rates as regulator pushes rule changes

Several lenders have decided to cut mortgage rates amid a mini-price war, even as the Bank of England (BoE) kept interest rates unchanged.

The average rate for a two-year fixed mortgage stands at 4.89%, while five-year fixed deals average 5.19%, according to data from Uswitch.

The Bank of England has kept interest rates at 4.25% amid inflation fears, delivering a blow to homeowners who were expecting a relief in their mortgage. The primary inflation measure, the C onsumer Price Index (CPI), stood at 3.4% in the 12 months to May, a slowdown from the previous month, but well above the BoE’s 2% target.

Amid the affordability crunch, the Financial Conduct Authority (FCA) has opened the door to greater flexibility around interest-only mortgages, which reduce monthly payments but leave the loan principal outstanding at term-end.

The regulator said it was seeking input on “whether our rules could better support more interest-only mortgages” and suggested such loans “could be suitable for consumers who may struggle to afford a repayment mortgage and can support sustainable home ownership.”

“Interest-only mortgages could substantially reduce the contractual monthly payment and potentially make the mortgage more affordable,” the FCA added.

Unlike traditional repayment mortgages, where borrowers gradually pay down the capital alongside interest, fully interest-only products require only interest payments during the term. The borrower must then repay the full loan amount at the end — a structure that can offer near-term relief but carries long-term risks.

Borrowers can make voluntary overpayments within permitted limits to reduce the principal during the term. If they fail to do so, however, repaying the full balance often requires selling the property.

Interest-only loans came under scrutiny after the 2008 financial crisis, with many issued without proof of a credible repayment plan. In 2009, the FCA’s predecessor labelled such products “high-risk” and, by 2012, described them as a “ticking timebomb.”

The regulator now insists that lenders confirm a “credible repayment strategy” before granting interest-only deals.

The FCA also noted shifts in borrowing patterns and labour market dynamics. In 2024, more than two-thirds (68%) of first-time buyers took out mortgages with terms of 30 years or more.

“Many people’s patterns of employment in the UK are now very different to those of earlier generations,” the FCA said in a discussion paper. “There is more use of short-term contracting, zero-hours contracts and more people are self-employed.”

First-time buyers with at least a 20% deposit can now buy with an interest-only mortgage. The lender, Gen H, claims it will help make home ownership more affordable, and help those who want to to escape the rental market.

This week among the major lenders, Barclays (BARC.L), Nationwide (NBS.L) and Halifax all reduced rates, going deeper into sub-4% territory for those with a 40% deposit.

HSBC (HSBA.L) has a 4.01% rate for a five-year deal, unchanged from the previous week. For those with a Premier Standard account with the lender, this rate is 3.96%.

Looking at the two-year options, the lowest rate is 3.99% with a £999 fee, also unchanged from the previous week.

Both cases assume a 60% loan-to-value (LTV) mortgage, meaning buyers need to have at least 40% for a deposit.

HSBC offers 95% LTV deals, meaning you only need to save for a 5% deposit. However, the rates are much higher, with a two-year fix at 5.05% or 4.89% for a five-year fix.

This is because their financial situation and deposit size determine the rate someone can get. The larger the deposit, the lower the LTV, allowing buyers to access better deals because lenders consider them less risky.

NatWest’s (NWG.L) five-year deal is 3.95% with a £1,495 fee, untouched from the previous week.

The cheapest two-year fix deal is 3.92%, again the same as last week. You’ll need at least a 40% deposit to qualify for the rates in both cases.

At Santander (BNC.L), a five-year fix is 4.08% for first-time buyers, the same as the week before. It has a £999 fee, assuming a 40% deposit.

For a two-year deal, customers can secure a 4.01% offer, with the same £999 fee, again unchanged.

However, the lender has cut a raft of deals for first-time buyers:

90% LTV two-year fixed rate with a £0 fee and £250 cashback. Rate reduced by 0.15% to 4.73%.

95% LTV two-year fixed rate with a £0 fee and £250 cashback. Rate reduced by 0.14% to 5.00%.

90% LTV five-year fixed rate with a £999 fee and £250 cashback. Rate reduced by 0.10% to 4.47%.

95% LTV five-year fixed rate with a £0 fee and £250 cashback. Rate reduced by 0.22% to 4.85%.

The new pricing is available to all customers, whether they are applying via a broker or directly, under Santander’s “no dual pricing” pledge.

Barclays (BARC.L) was the first among major lenders to bring back under-4% deals and currently has a five-year fix at 3.99%, unchanged from last week. For “premier” clients, this rate drops to 3.98%.

The lowest for two-year mortgage deals is 3.89%, a drop compared to last week’s 3.97%.

Barclays last month launched a mortgage proposition to help new and existing customers access larger loans when purchasing a home. The initiative, known as Mortgage Boost, enables family members or friends to effectively “boost” the amount that can be borrowed toward a property without needing to lend or gift money directly or provide a larger deposit.

Under the scheme, a borrower’s eligibility for a mortgage can increase significantly by including a family member or friend on the application. For example, an individual with a £37,500 annual income and a £30,000 deposit might traditionally be able to borrow up to £168,375, enabling them to purchase a home priced at around £198,375.

However, with Mortgage Boost, the total borrowing potential can rise substantially if a second person, such as a parent, joins the application. In this case, if the second applicant also earns £37,500 a year, the combined income could push the borrowing limit to £270,000, enabling the buyer to afford a home worth up to £300,000.

Nationwide’s (NBS.L) lowest mortgage rate for first-time buyers is 4.19% for a five-year fix, which is lower than the previous 4.24%.

First-time buyers are currently looking at 3.99% for a two-year fix, again lower than last week’s 4.04%. Both deals require a 40% deposit and a £1,499 fee.

The lender has adjusted its mortgage affordability calculation by reducing stress rates by 0.75 and 1.25 percentage points, helping applicants borrow more, whether buying a first home, moving, or remortgaging.

Applicants can borrow, on average, £28,000 more; however, in some remortgage cases, customers could borrow up to £42,600 more.

Nationwide also reduced its standard stress rate and the rate applied to eligible first-time buyers and home movers fixing their deal for at least five years.

Halifax, the UK’s biggest mortgage lender, offers a five-year rate of 4.03% (also 60% LTV), lower than last week’s 4.02%.

The lender, owned by Lloyds (LLOY.L), offers a two-year fixed rate deal at 3.94%, with a £999 fee for first-time buyers, lower than the previous 3.97%.

It also offers a 10-year deal with a mortgage rate of 4.78%.

Halifax has enhanced its five-year fixed mortgage products by increasing borrowing capacity. This improvement allows borrowers to access up to £38,000 more, enabling them to secure larger mortgages based on individual incomes.

Rachel Springall, finance expert at Moneyfacts, said: “The flourishing choice of low-deposit mortgages will no doubt be welcomed by borrowers looking to remortgage or are a first-time buyer.

“The government has been clear that it wants lenders to do more to boost UK growth, and so a rise in product availability for aspiring homeowners is a healthy step in the right direction.”

Barclays (BARC.L) currently offers some of the lowest rates on the market, with a two-year fix coming in at 3.89%. NatWest (NWG.L) takes the crown for a five-year fix with its 3.95% deal. However both require a hefty 40% deposit.

The average UK house price is £297,781, so a 40% deposit equals about £120,000.

A growing number of homeowners in the UK are opting for 35-year or longer mortgage terms, with a significant rise in older borrowers stretching their repayment periods well into their 70s.

Lender April Mortgages offers buyers the chance to borrow up to six times their income on loans fixed for five to 15 years, from a deposit of 5%. Both those buying alone and those buying with others can apply for the mortgage.

As part of the independent Dutch asset manager DMFCO, the company offers interest rates starting at 5.20% and an application fee of £195.

Skipton Building Society has also said it would allow first-time buyers to borrow up to 5.5 times their income to help more borrowers get on the housing ladder.

Leeds Building Society is increasing the maximum amount that first-time buyers can potentially borrow as a multiple of their earnings with the launch of a new mortgage range. Aspiring homeowners with a minimum household income of £40,000 may now be able to borrow up to 5.5 times their earnings.

Mortgage holders and borrowers have faced record-high repayments in recent years, as the Bank of England’s base rate has been passed on by banks and building societies.

According to UK Finance, 1.3 million fixed mortgage deals are set to end in 2025. Many homeowners will hope the Bank of England acts quickly to cut rates more aggressively. At the same time, savers will likely root for rates to remain at or near their current levels.

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Lenders drop mortgage rates as regulator pushes rule changes

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