UK mortgage rates are falling: what to do with any savings

The New Year is bringing with it a welcome reduction in mortgage rates – with HSBC the first big lender to cut its rates in 2026.

Clearly anyone on a five-year fixed rate might be facing up to a painful increase in repayments but if you are moving off a two-year fix, there’s a decent chance you could have a bit of extra cash in your pocket. A trend which should accelerate if, as expected, the Bank of England lowers interest rates further this year.

How much might you shave off repayments?

Data from Moneyfacts shows that, for someone with a 60% loan-to-value mortgage, the average two-year fixed rate is down from 5.41% in January 2024 to 4.28% today. If you had mortgage debt of £250,000 and a remaining mortgage term of 25 years then you would be paying £1,522 a month based on the figure from two years ago and £1,358 based on the current average rate.  

If you’re on a tracker mortgage the difference is even more stark – with the average rate for all loan-to-values falling from 6.15% in January 2024 to just 4.44%. If we assume the same term and amount of debt as in the earlier example this would translate into a drop from £1,634 to £1,381 in terms of monthly payments.

Rather than just allowing any savings – £164 and £253 respectively in our illustrations – to be absorbed into your day-to-day spending it is worth looking closely at what you might do with the money.

What about overpaying on your mortgage?

According to figures from lender Nationwide if you had a mortgage balance of £250,000, a remaining term of 25 years and were paying 4.28%, as per our two-year fixed rate example, you could pay £30,801 less in interest and reduce your term by four years and four months if you put the £164 towards monthly overpayments.

Online mortgage calculators would enable you to do the sums based on your own circumstances. Though remember, it is important to check how much you can overpay without incurring a penalty.

How much could you make if you invested the money?

Using our ISA calculator, if you put a monthly sum of £164 into the stock market and achieved a return of 6% (roughly in line with the long-term average for markets) over 20 years you would have a pot worth £69,726 (encompassing fees of 0.6%)  – considerably more than the interest saving in the example above.  

This could be different based on your own mortgage and, for some, the greater certainty around the impact of making overpayments might outweigh the potential benefits of investing the cash.

What do falling mortgage rates mean for stocks?

More affordable mortgages should translate into increased demand in the property market which, in turn, is good for housebuilders like Persimmon and Barratt Redrow and estate agents such as Foxtons which trade on the stock market. In addition, if people are paying less on their mortgage they may be more willing to spend elsewhere, giving a broader boost to consumer-facing businesses.