A dramatic shift is forecast for the UK housing market as 2026 begins, with mortgage brokers predicting interest rates could tumble to below 3.5% in the coming weeks. This potential plunge follows a sluggish end to 2025 and signals the start of what industry experts warn could become a full-blown rate war among high street lenders.
The Drive Towards a New Year Rate War
Brokers report that lenders are entering January with aggressive targets to fill loan books after a quiet period. Many had seen transactions put on ice ahead of the late November Budget, creating a backlog of pent-up demand. This commercial pressure is expected to trigger fierce competition, with a New Year Sale mentality taking hold.
Major banks are anticipated to start shaving rates within the first fortnight of January, with 3.5% becoming a key benchmark. In a pre-emptive strike, Leeds Building Society has already announced cuts. The lender has reduced residential and first-time buyer fixed rates by up to 0.20% for new borrowers, and offered reductions of up to 0.26% for existing customers looking to borrow more.
Economic Conditions Fueling the Fall
The predicted mortgage rate cuts are underpinned by a favourable economic backdrop. On December 18, 2025, the Bank of England lowered the base rate to 3.75%, its lowest point in nearly three years. Financial markets expect further reductions in the first half of 2026, potentially bringing the base rate down to 3.5% by June.
This monetary policy easing is possible because inflation is cooling, recently recorded at 3.2%. This downward trajectory has given the central bank the necessary wiggle room to act, which directly filters through to cheaper home loan pricing. Santander currently holds a market-leading two-year fixed rate of 3.55% for borrowers with a 40% deposit, but brokers expect this to be undercut soon.
What This Means for Borrowers in 2026
The impact of falling rates will be significant for two key groups. First-time buyers are poised to become the primary market drivers, aided by lower mortgage costs and more relaxed affordability rules. Mortgage costs as a share of income are now at their most favourable level since 2022.
For the approximately 1.8 million households due to remortgage in 2026, the prospect of securing a deal starting with a '3' is a welcome relief. Experts advise those whose deals expire in the next six months to secure a rate now but to keep it under review, as further slides are anticipated. Some brokers even suggest that if conditions remain stable, two-year fixed rates could dip below 3% by spring 2026.
