Written by Zara Bray, mortgage expert at Quilter
The latest Moneyfacts data showing that average two- and five-year fixed mortgage rates have increased for the first time in eight months is a reminder that the return to equilibrium in the mortgage market is anything but smooth. After months of gentle easing, many borrowers had begun to enjoy more favourable pricing and a sense of breathing room. But with this uptick, albeit small, the tone shifts. It is a signal worth paying attention to.
Over the past year, numerous lenders effectively priced in future cuts to the Bank Rate and competed for new business. Some of the more competitive deals on the market looked tempting, even when underlying funding challenges may have suggested caution. That scramble for share helped sustain the downward movement of mortgage pricing. Now that inflation remains sticky and expectations on central bank moves have become more cautious, some of those overly ambitious pricing plays are being dialled back, nudging rates slightly higher.
That said, it would be premature to call this the beginning of a full rate spiral. What appears more likely is a recalibration. Lenders are adjusting to firmer funding costs, a more guarded central bank stance, and trimmed down assumptions about future cuts. In this phase, mortgage pricing may wander within a relatively narrow band, reacting to data moves and policy cues rather than racing ahead in one direction.
In the short term several forces will dominate. First, swap rates, which underpin fixed mortgage costs, will remain volatile as markets wrestle with the likely timing and magnitude of future rate reductions. Second, inflation figures and wage growth, including any surprises, will carry greater weight in guiding expectations. Third, fiscal announcements and housing-related measures remain a wildcard. The budget, changes to stamp duty rules or targeted buyer incentives may nudge demand in either direction and shift lender appetite. Fourth, competitive dynamics among lenders will not vanish. Even as margins come under pressure, the market share battle will continue.
For borrowers preparing to switch or remortgage, this backdrop calls for a balanced approach. Mortgage costs are certainly lower than last year’s peaks. The shock of leaving ultra-low pandemic-era deals is easing and a new normal has emerged. For planning purposes, assuming a band of between 4 and 5 percent is a sound base; if you find something below that, consider it a bonus outcome rather than your starting point.
First-time buyers face a nuanced landscape. Strong competition earlier in the year and more innovation from lenders, matched with softening in housing markets, created more opportunity. Nevertheless, affordability assessments remain a challenge. Rates shifting even slightly can alter what a buyer can borrow. That means getting an agreement in principle early, stress testing the budget against higher rates, and acting swiftly when a standout product appears remain essential.
Where possible, secure your clients a product in good time, keep it under review, and prepare to switch if a more competitive offer is launched before completion.
Although the market has slowed due to uncertainty ahead of the budget, lenders are still expecting a cut in February and improved swap rates, so rates are likely to be coming down soon enough to benefit from the opportunity post budget when client appetite returns.
Looking further ahead, the medium-term outlook is still cautiously optimistic and there is likely to be a steady pipeline going into 2026. Transaction numbers may be relatively flat against this year but hopefully there will be a positive move towards a greater remortgage market versus product transfer and a slight improvement on overall house prices.
At its heart, the latest increase in mortgage rates should not cause too much concern. It is a signal that the market is recalibrating after lenders had priced in cuts and fiercely competed for share. In this changing landscape, advisers must help households find products that suit their individual needs, embed flexibility where possible, and remain steady in a market where rates ebb and flow. There is still a strong desire for homeownership and it’s important that, as a sector, we continue to meet those customer demands.
