Mortgage rate rises: Natwest drop borrowing rates to lowest level in years

Following the Bank of England's recent decision to cut the base rate to 4.75%, mortgage lenders are adjusting their offers to reflect the change.

NatWest has responded with a new 5-year fixed-rate mortgage deal, providing borrowers with a competitive initial interest rate of 3.89%, its lowest level in years.

Whether you’re looking to secure a renovation mortgage or self build mortgage we look at how this could affect you and how a more competitive mortgage market will impact house prices.

NatWest’s new mortgage deal

NatWest's new mortgage offer is for a 5-year fixed rate mortgage with an initial interest rate of 3.89%, which will remain the same until the end of February, 2030.

For example, if you're borrowing £200,000, your monthly payment would be £1,044, and you would pay £12,718 in the first year, plus the £1,025 set-up fee.

The APRC (Annual Percentage Rate of Charge), which includes the interest rate and other costs over the lifetime of the loan, is 6.4%.

Before the change in base rate NatWest were offering a 3.97% interest rate, and with the base rate predicted to drop even lower in the long-term mortgages could fall even lower.

Matt Smith, Rightmove’s mortgage expert, said: “This Base Rate decision comes at the end of a run of important macro-economic and political events on both sides of the Atlantic.

"All of this has resulted in a view that Base Rate will be cut at a more moderated pace than previously expected and has been priced in by lenders. Therefore we are likely to see average mortgage rates drift up a little in the short term, before starting to fall back again.”

How will you be affected by mortgage rate declines?

For those with variable rate tracker mortgages linked to the Bank of England base rate, a base rate decrease will likely result in an immediate lowering in mortgage payments.

People with standard variable rate mortgages may also see their rates decrease with any interest rate decline, but the exact change depends on the lender, so it's not guaranteed. To be sure, check your mortgage terms in the original offer document.

Those with fixed-rate mortgages won't see immediate changes in their payments, but they will be affected when their fixed term ends.

The impact on your mortgage payments depends on your mortgage type and when your current deal expires.

How will renovators be affected?

Interest rate rises could affect those renovating a house in a couple of different ways. Those who’ve taken out a loan to fund their project could find that a decline in interest rates means the project will cost less to complete.

Renovation mortgages often have higher interest rates than regular ones because lenders take on more risk when lending money for home improvements. However, they can still be a helpful choice if you want to enhance your home but can't afford to pay for it all at once.

As for renovation mortgages, it is likely that those on tracker or variable mortgages will be affected if interest rates decline. But as with conventional mortgages, those on fixed-rate deals will be unaffected.

What about self builders? 

Self build mortgage interest rates generally exceed standard rates for purchasing or refinancing a home, typically ranging from 5% to 7% annually.

The associated arrangement fees are subject to variation, contingent upon the chosen broker or lender.

Additionally, the duration of your commitment to the lender typically ranges from one to three years, depending on the specific lender and product selected.

Inflation is also impacting building materials with rising prices and construction materials shortages impacting those looking to build their own home.

Could interest rates fall again?

The Bank of England will hold its next interest rate meeting on 18 December 2024 where they will decide whether the base rate goes up, down or stay the same.

Tim Parkes, CEO of RAW Capital Partners, said: “With services inflation still a persistent issue and consumer spending expected to rise over the festive season, the CPI could tick up in the coming months, potentially resulting in a slower pace of base rate cuts than previously predicted.

“That said, the bigger picture is encouraging. Any rate reduction is positive news for the lending and property markets. Although rates may never return to the historic lows seen between 2008 and 2021, they are trending in a favourable direction, making it easier for homeowners and investors to manage both current and future loans.”

Paresh Raja, CEO of Market Financial Solutions, said: "It’s important to recognise that interest and mortgage rates remain significantly higher than pre-December 2021 levels.

"As a result, securing suitable financing options will still be a significant challenge for some borrowers – this is where the specialist lending sector will continue to play a vital role. To help build momentum in the property market, lenders must now step up and focus on providing a diverse range of bespoke and flexible financial products that can meet the specific needs of brokers and their clients."

As well as the cuts from NatWest as August progresses, further rate cuts are expected from other major lenders such as HSBC, Santander, Halifax and Barclays, contributing to a highly competitive mortgage landscape.

Tim Parkes

Tim has over 30 years of experience in fund management, banking, and financial services, including senior positions at a FTSE-listed bank and over 10 years managing offshore funds.

Paresah Raja

Paresh Raja founded Market Financial Solutions in 2006. The company specialises in providing bridging loans and buy-to-let mortgages, catering specifically to property investors who need fast, flexible financing solutions for their real estate projects.