Mortgage payments could drop for homeowners as Bank of England cuts interest rate

UK interest rates have been cut for the second time this year, as the Bank of England forecast a “gradual” reduction in borrowing costs despite uncertainty following the Autumn Budget. The Bank’s Monetary Policy Committee (MPC) announced that rates were being reduced from 5 per cent to 4.75 per cent on Thursday.

Governor Andrew Bailey said UK inflation falling below its 2 per cent target meant policymakers had been able to cut rates to the lowest level since June last year. He said: “We need to make sure inflation stays close to target, so we can’t cut interest rates too quickly or by too much,” he said. But if the economy evolves as we expect, it’s likely that interest rates will continue to fall gradually from here.”

The decision is set to relieve some pressure on borrowers who have faced elevated mortgage and loan costs since rates started rising three years ago.

The MPC said it considered the Autumn Budget unveiled by Chancellor Rachel Reeves last week, in particular her decision to raise taxes for businesses.

Tax rises and a higher level of public spending are expected to boost economic growth by 0.75 percentage points at its peak in a year’s time, relative to previous forecasts published in August.

The Budget is also expected to increase Consumer Prices Index (CPI) inflation by just under 0.5 percentage points in late 2026. It means inflation will now reach the Bank’s 2 per cent target in the second quarter of 2027, a year later than it previously projected.

The MPC said there is “significant uncertainty” over the outlook for the jobs market, with businesses set to face a bigger national insurance tax bill and a higher national minimum wage from April.

The impact on inflation would “depend on the degree and speed with which those costs would be transmitted into prices, wages, employment” or absorbed into profits. If businesses choose to raise their prices for consumers, this could put pressure on inflation, according to the MPC’s analysis.

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Impact on mortgages

John Fraser-Tucker, Head of Mortgages at mortgage broker Mojo said, “Today’s decision by the Bank of England to reduce the base rate to 4.75 per cent is a significantly positive move for mortgage borrowers. This second rate cut of the year brings relief to both homeowners and potential first-time buyers.

“We’re optimistic that this change will encourage mortgage lenders, who have recently raised their rates, to rethink their pricing strategies and lower their rates in the coming weeks.”

He added that existing mortgage holders should be “pleased” with this decision, as it presents new possibilities for securing better deals or benefiting from adjustments on current products, potentially easing financial pressures.

First-time buyers

The mortgage expert said: “For first-time buyers who have been waiting patiently for a more favourable environment, this could finally open the door to homeownership. Not only are mortgage rates expected to decrease, but first-time buyers also have until March 31 to take advantage of stamp duty relief, which allows you to purchase your first property without paying stamp duty on homes valued up to £425,000.

“After April 1, this threshold will drop significantly to £300,000, making it important to act quickly in the coming months - especially if you live in regions like the East of England, South East, or London, where the average property price for first-time buyers exceeds £300,000.

“Overall, this move by the Bank of England is nothing short of positive and could mark a significant turning point for the mortgage market, offering both optimism and opportunity for current and future borrowers.”

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Impact on different mortgage types

John Fraser-Tucker explained the likely impact of this reduction on mortgage borrowers across various product types.

Those on tracker mortgages could save £1,416 over two years. John said, “Borrowers with tracker mortgages will see an immediate benefit from this rate cut, resulting in lower monthly payments.

“For instance, consider a 75 per cent loan-to-value (LTV) mortgage over a 25-year term for an average-priced house (£267,500). When the base rate was 5.00 per cent, the average monthly payment would have been £1,172. With the base rate now at 4.75 per cent, the predicted mortgage payment drops to £1,143 - a monthly saving of £29, or £696 over two years.”

Those on fixed-rate mortgages could see a 0.20 per cent drop. John said, “Due to their stability, fixed-rate mortgages are the most popular mortgaged type, with nearly three-quarters (74%) choosing this option. However, with this stability comes no changes for those currently on a fixed-rate mortgage - your rate won’t change until your mortgage deal ends.

“However, for those looking to enter the property market soon or nearing the end of their fixed-rate term, today’s base rate reduction is extremely positive news. We expect to see more affordable fixed-rate deals becoming available soon, which can significantly affect how much you pay per month.”

Those on a standard variable rate (SVR) mortgages should speak to a mortgage broker. John said, “The standard variable rate is a lender's default interest rate, typically applied when an initial mortgage deal ends. With today's base rate reduction, we expect lenders to adjust their SVRs downward in the coming weeks.

“However, it's crucial to understand that SVRs are often significantly higher than other available rates. For instance, last week, while the average SVR across the big six lenders was 7.25 per cent, the average 2-year fixed rate stood at 4.52 per cent, and the average 5-year fixed rate at 4.16 per cent.”

John added: “If you're currently on an SVR or unsure about your rate, I'd encourage you to review your mortgage statement. Look for sections labelled 'interest rate' or 'current terms'. Many borrowers may not realise they're on this potentially higher rate.

“For those on SVRs, exploring your options could lead to substantial savings. Speaking with a mortgage broker can provide valuable insights into more competitive deals tailored to your personal circumstances. They can help you navigate the current market and potentially find options that significantly reduce your monthly payments."

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