Interest rates on five-year fixed-rate mortgages are likely to drop beneath 4 per cent at the start of next year, experts have predicted, as lenders rapidly reduce their rates to try to encourage borrowers back to the market.

Platform, which is owned by the Co-operative bank, will on Monday become the first lender in more than a month to offer a five-year fixed-rate mortgage at under 5 per cent when it introduces a 4.84 per cent rate for borrowers with deposits of 40 per cent.

The deal follows a flurry of other lenders reducing their rates this week including Leeds and Coventry building societies, Halifax, HSBC, NatWest, Nationwide and Barclays.

Analysts said that banks were becoming more optimistic about the long-term outlook for interest rates after Andrew Bailey, the governor of the Bank of England, signalled that there would be no rapid ratcheting up of the base rate in 2023 and suggested markets were wrong to predict a peak of 4.75 per cent.

“Fixed-rate mortgage pricing has been edging down over the past few weeks and if this continues, we would expect five-year fixes below 4 per cent by early 2023,” said Mark Harris, chief executive of SPF Private Clients, a broker. “With lenders reporting that volume and activity is falling away thanks to higher rates, it is a trend we expect to continue.”

This week, the first ten-year fixed-rate mortgage at under 5 per cent was announced since the start of October. The 4.99 per cent deal is offered by First Direct for borrowers with a 40 per cent deposit.

Rates have soared in recent weeks as the Bank of England raised the base rate of interest eight times to try to counter soaring inflation, which hit 10.1 per cent in the year to September.

The average two-year fixed rate is now 6.3 per cent, up from 2.3 per cent a year ago, according to Moneyfacts, the personal finance analytics company. This would push monthly payments on a 25-year £200,000 loan up £456 to £1,340. Meanwhile, the average five-year fixed rate is now 6.1 per cent, up from 2.6 per cent a year ago.

However, the picture is rapidly improving. On October 20, with the markets reeling in the weeks after Liz Truss’s disastrous mini-budget, the two-year fixed-rate average was as high as 6.65 — the highest rate seen since August 2008 — and 6.51 on five-year deals.

The cheapest two-year fixed rate is now 5.49 per cent from the West Brom building society, for a borrower with a 25 per cent deposit. Until Platform’s new deal, the best five-year fix was with First Direct at 5.24 per cent.

Aaron Strutt, a broker at Trinity Financial, said predicted falls in property prices would make rates more affordable for borrowers next year as banks battled for a diminishing number of customers.

“Next year, if the market continues to deteriorate and people are not buying houses, they will have to work a bit harder to get the applications in. If that happens, it will mean cheaper rates,” he said.

The Royal Institution of Chartered Surveyors this week reported that demand in the housing market in October fell at the fastest pace since the 2008 financial crisis, excluding spring 2020 when the housing market was shut down by the first Covid-19 lockdown.

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