Mortgage lenders think rates may have peaked

Interest rates on five-year fixed mortgages fell below 5 per cent for the first time in six months this week, as a flurry of lenders slashed their prices in the belief that interest rates have now peaked.

Interest rates on five-year fixed mortgages fell below 5 per cent for the first time in six months this week, as a flurry of lenders slashed their prices in the belief that interest rates have now peaked.

Alliance & Leicester was the first to bite the bullet, and offer a five-year fixed rate of 4.99 per cent. Newcastle Building Society followed suit yesterday. Others are expected to also lower rates below 5 per cent over the coming weeks.

Elsewhere in the market, Norwich & Peterborough Building Society reduced its five-year fix to 5.34 per cent, while Skipton reduced its five-year rate to 5.29 per cent. Two-year fixed rates were also cut by several lenders. A&L reduced its two-year rate to 4.79 per cent, while Skipton cut its rate to 4.99 per cent.

The cuts follow several weeks of speculation in the interest rate markets that Bank of England borrowing costs have now peaked. Base rates have now been held at 4.75 per cent for the last three consecutive months. Rates are also all but guaranteed to stay the same in both December and January, as the Bank of England prefers not to raise rates immediately before or after Christmas, when consumer borrowing rates are at a high.

However, speaking earlier this week, Mervyn King, the governor of the Bank of England, made it clear that further rises in the base rate have not been ruled out. He said which way rates go will now depend on the movement in key economic indicators, such as GDP growth, inflation and house prices, over the coming months.

The latest cuts in mortgage rates could temporarily help to reignite the housing market, as borrowing becomes more affordable. However, mortgage brokers believe that most people are still nervous enough about the future prospects of house prices to stay away from the market.

However, David Hollingworth of London & Country Mortgages says he believes the latest mortgage rate cuts may cause another spike in remortgaging. "I think people are generally less confident in the housing market, and are now starting to feel the effects of the previous rises in interest rates," he said. "But remortgaging has remained strong, and there are some good opportunities for people to save money on their current mortgages now that fixed rate deals are coming down."

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