For the first time in nearly three years, the average two-year fixed-rate mortgage in the UK has dipped below 5%, marking a significant moment for both homeowners and the broader housing market. According to financial data provider Moneyfacts, the average rate stood at 4.99% on August 13, 2025, down from 5.00% just the previous day. This is the first instance since September 29, 2022—just before former Prime Minister Liz Truss’s controversial mini-budget—that such a milestone has been reached.
The mini-budget, announced in September 2022 by then-chancellor Kwasi Kwarteng, included £45 billion in unfunded tax cuts. The move, which was not accompanied by analysis from the Office for Budget Responsibility, triggered severe turbulence in the UK financial markets. The fallout was swift: government borrowing costs soared, the value of the pound plunged, and the nation’s pension funds teetered on the brink of crisis. Mortgage rates responded in kind, with the average two-year fixed deal peaking at a staggering 6.65% on October 20, 2022, according to BBC News.
Since that period of chaos, the mortgage market has gradually stabilized. The slide back below the 5% threshold is being hailed as a "symbolic turning point" by Adam French, head of news at Moneyfactscompare.co.uk. French explained, "While the cost of borrowing is still well above the rock-bottom rates of the years immediately preceding that fiscal event, this milestone shows lenders are competing more aggressively for business."
Despite this positive development, the cost of borrowing remains considerably higher than before the mini-budget. In early 2022, the typical two-year fixed mortgage rate hovered around 2.38%, as shown in historical data from Moneyfacts. The sharp rise in rates after the mini-budget reflected not only the government’s fiscal decisions but also a global trend of central banks raising interest rates to combat inflation—exacerbated in the UK by energy price shocks following Russia’s invasion of Ukraine.
What’s behind the latest drop in mortgage rates? The Bank of England’s recent decision to cut its base interest rate from 4.25% to 4%—its third reduction of 2025 and the lowest level since March 2023—has played a central role. As reported by Sky News, this move was a response to signs of a struggling economy, even as inflation remains stubbornly above target. The reduction in the base rate has made borrowing less expensive for lenders, and, in turn, for homebuyers.
However, the future path of mortgage rates remains uncertain. Inflation, which rose to 3.6% in the year to June 2025 (driven by higher food and clothing costs), is forecast by the Bank of England to spike to 4% in the autumn. The central bank does not expect inflation to return to its 2% target until 2027 or later. As a result, many analysts, including Moneyfacts, believe the base rate is likely to hold around its current level for some time, limiting the scope for further substantial mortgage rate cuts in the near term.
Market watchers are also keeping an eye on expectations for further base rate reductions. The London Stock Exchange Group (LSEG) data indicates that traders are betting on another rate cut before the end of 2025, possibly bringing the base rate down to 3.75% by December. Such expectations can influence the rates lenders are willing to offer, but as Moneyfacts noted, "mortgage providers are reluctant to offer cheaper products" while inflation risks persist.
The competitive landscape among lenders has become increasingly fierce, with some two-year fixed rates now as low as 3.7%, according to Hina Bhudia, a partner at Knight Frank Finance. Bhudia described the current market as "ultra-competitive," noting that lenders are cutting margins "extremely thin" to attract business. Yet, she cautioned, "the future is uncertain," and further significant declines in rates are not guaranteed.
The implications of these shifts are far-reaching, especially for the roughly 1.6 million fixed-rate mortgage deals set to expire in 2025. Of these, about 900,000 will come due in the second half of the year, according to UK Finance. For borrowers facing the end of their fixed terms, the prospect of lower rates offers a glimmer of hope after years of rising costs. Alan McKenzie of Your Next Step Mortgage described the recent rate drop as "a real breath of fresh air," adding, "The repeated lender updates announcing rate cuts are particularly encouraging, especially for borrowers monitoring the market."
Mortgage brokers are also likely to see increased demand for their services as clients seek advice on refinancing or securing new deals. Rikesh Tailor of Mortgage Knight pointed out that the drop in rates "marks a symbolic shift in rates where shorter-term rates are cheaper than longer-term rates," calling it "a positive change from the market turmoil of September 2022." Richard Alton of Alton Mortgages echoed this sentiment, noting, "The key message from us is that it is good news rates are reducing as this does give buyers confidence and enables better deals when re-mortgaging."
Meanwhile, the housing market has shown resilience in the face of economic headwinds. Halifax, one of the UK’s largest mortgage lenders, reported that average house prices ticked up by more than £1,000 in July to £298,237—close to a record high. Amanda Bryden, Halifax’s head of mortgages, commented, "With mortgage rates continuing to ease and wages still rising, the picture on affordability is gradually improving." She added that more flexible affordability assessments and the ongoing resilience of the market suggest "house prices will follow a steady path of modest gains through the rest of the year."
Yet, challenges remain. Inflationary pressures, sluggish economic growth, and the sheer number of borrowers facing the end of their fixed-rate terms all contribute to a complex outlook. Adam French of Moneyfacts cautioned, "While mortgage rates have followed the mood music set by successive cuts to the Bank of England base rate, homeowners and first-time buyers may have to wait longer for more substantial cuts."
As the UK mortgage market navigates these shifting tides, borrowers, lenders, and brokers alike are watching closely. The drop below 5% is undeniably a milestone, but the road ahead is paved with uncertainty. For now, though, this rare dip has brought a measure of relief—and perhaps a dash of optimism—to a market still healing from the shocks of the past few years.
For many, the hope is that this “symbolic turning point” signals a new era of stability and opportunity, even as the broader economic picture remains unpredictable.
