Co-op Bank has announced a reduction of mortgage rates by up to 1.26 percentage points, introducing a two-year fixed-rate mortgage for existing customers at 3.85%. This marks the first time in 15 months that a two-year mid-rate has fallen below 4%. Additionally, they have launched a five-year optimal fixed-rate at 3.84%.

In the preceding week, several major banks in the UK had already made substantial interest rate cuts, resulting in the average mortgage rate dropping to the lowest levels since June 6.

In addition to Co-op Bank, other lending institutions, including Atom Bank, First Direct, TSB, and Leeds Building Society, have also lowered rates. It is anticipated that other major banks like Barclays, Nationwide Building Society, and Santander will follow suit this week.

According to data from financial data analytics firm Moneyfacts, the average two-year fixed-rate has decreased from 6.04% in early December to 5.83% last Friday, and the average five-year fixed-rate has dropped from 5.65% to 5.46%.

These new lower rates will assist in alleviating concerns for many individuals looking to escape high-interest home loans. According to data from the UK Finance, around 1.6 million homeowners will face the expiration of existing mortgage deals this year. While they still face the prospect of paying more interest, this round of rate cuts will mitigate some of the impact.

Furthermore, the decline in mortgage rates is likely to ease pressure on further declines in house prices. Halifax reported a 1.1% year-on-year increase in house prices in December, showing signs of a recovery for the third consecutive month.

The Bank of England also stated that the approval of mortgages for new homes rose for the third consecutive month in November, as the reduction in mortgage rates since September attracted more buyers.

These series of rate cuts are in response to changes in the current economic situation and market demand. With the relatively smaller size of the mortgage market, banks need to further reduce rates to attract more homebuyers. Additionally, it is anticipated that the Bank of England will reduce benchmark rates in the near future due to rapidly declining inflation.

However, it is not expected that mortgage rates will further significantly decrease, as current rates are already close to the future expected levels of the Bank of England's benchmark rate. Banks typically price their fixed-rate deals based on the benchmark rate.