Analysis from Octane Capital showed that based on figures from UK Investing, average one-year swap rates had dropped from 5.3 per cent in November to 5.2 per cent in December.
It was also significantly down on a high of 6.09 per cent in July.
Five-year swap rates came to 4.32 per cent this month, down from 4.48 per cent last month. Again, this was down from 5.25 per cent in July, the highest average five-year swap rate recorded this year.
Mortgage market swap rates reflect the price lenders have to pay financial institutions when securing fixed rate funds, which they use to offset short-term risks associated with fixed rate mortgages.
As a result, the cost of swap rates and whether they rise or fall influences mortgage rates.
Octane Capital said swap rate activity suggests the markets believe the Bank of England will reduce the base rate rather than increase it. This should feed through to lower mortgage rates even before the base rate actually starts to come down.
The Bank of England is expected to announce that the base rate has been held this Thursday.
Jonathan Samuels, CEO of Octane Capital, said: “Falling inflation means the Bank of England’s strategy over the past two years seems to be working, albeit the reduction in headline inflation has been largely driven by food and energy price drops.
“Core inflation has proved more stubborn and so we can expect to see rates held for a third time this week, but this will still be welcome news for mortgage holders who have seen the cost of their repayments climb considerably in recent times.
“Such a consistent reduction in swap rates in recent months should also bring hope to borrowers as this suggests that more affordable mortgage rates are on the horizon as lenders pass on the benefit to mortgage holders.”
