The Bank of England has cut interest rates by 0.25 percentage points to 4.5% in a major boost for homeowners today.
The base rate is what the Bank of England charges other lenders when they borrow money. This rate influences the interest you’re charged as a customer. So when the base rate is higher, borrowing becomes more expensive, and when it drops, things should become cheaper.
The majority of financial analysts predicted that the Central Bank would cut rates today after holding them at 4.75% when they met in December last year. The bank’s base interest rate is the main tool for managing inflation in the UK, which currently sits at 2.5% – which is above the Bank of England’s target of 2%. Inflation is also now far below the peak of 11.1% reached in October 2022.
Back in December, Bank of England Governor Andrew Bailey said it would take a “gradual approach to future interest rate cuts” adding: “We can’t commit to when or by how much we will cut rates in the coming year.” Today, all of the Bank’s Monetary Policy Committee (MPC) voted to cut the base rate. Seven opted for a cut of 025 percentage points, while two voted for a bigger cut of 0.5 percentage points.
Announcing the decision, the Bank said: “There has been substantial progress on disinflation over the past two years, as previous external shocks have receded, and as the restrictive stance of monetary policy has curbed second-round effects and stabilised longer-term inflation expectations.
“That progress has allowed the MPC to withdraw gradually some degree of policy restraint, while maintaining Bank Rate in restrictive territory so as to continue to squeeze out persistent inflationary pressures.” Going forward, the Bank of England said it expects the UK economy to grow by 0.75% in 2025, down from a previous forecast of 1.5%, before accelerating in 2026.
The base rate can affect everything from mortgages to the rates applied to credit cards – we round up everything you need to know following the latest announcement.
How does it affect my mortgage?
The effect on your mortgage payments depends on the type of deal you’re on. Those who have a tracker mortgage see their monthly payments go up and down with the base rate. This means they get more expensive when the base rate rises and become cheaper when it drops. As the base rate has been cut today, people on tracker mortgages will see their monthly payments come down straight away.
Standard variable rate (SVR) mortgages are typically the most expensive, and it is normally up to your lender to decide when they should put up or down rates. SVR mortgage holders normally receive news about whether their mortgage is going up a few days after any base rate change has been announced. You are usually placed onto an SVR mortgage when your current deal ends
If you are on a fixed mortgage rate, you pay the same rate each month for the term of your contract. This means you are protected from any rises during your deal. But when you come to remortgage, you will likely find you’re locking into a new rate that is more expensive than your existing deal, This is because a lot of fixed rate deals were set when mortgage rates were at an all time low a few years ago.
According to the latest data from financial comparison website Moneyfacts, the average two-year fixed residential mortgage rate today sits at 5.50%, and the average five-year fixed rate is 5.30%. The average SVR deal currently sits at 7.78%.
Rachel Springall, Finance Expert at Moneyfacts, said: “Millions of borrowers are due to come off cheap fixed mortgages, so they will be waiting with bated breath for mortgage rates to fall. The incentive to switch away from a standard variable rate (SVR) remains prevalent as a typical mortgage borrower being charged the current average SVR of 7.78% would be paying £355 more per month, compared to a typical two-year fixed rate.”
Responding to today’s decision, John Fraser-Tucker, Head of Mortgages at mortgage broker Mojo Mortgages said the news, of course, was good for mortgage holders across the UK. He noted that the reduction means “real, tangible benefits for homeowners”.
He added: “Variable-rate mortgage customers can expect to see their monthly payments drop. For example, for someone with a £200,000 mortgage over a 30-year period, this will be a predicted saving of £29 per month. Whilst this may not seem like a lot, it’s a saving of £10,440 over the full mortgage period.
“First-time buyers will also see some positives. Lower base rates are likely to result in slightly more attractive mortgage products, potentially improving affordability at a time when getting on the property ladder has been challenging. For those coming to the end of fixed-rate deals, now’s a good time to explore the market as lenders are likely to introduce more competitive rates.”
However, Fraser-Tucker noted that mortgage rates were still much higher than the “rock-bottom levels” the UK saw a few years back, and the housing market remains complex, so people will need to be vigilant in regard to any changes which may be introduced in the coming weeks.
According to recent data released by UK Finance, there has been a slight fall in the total number of homeowner mortgages in arrears. However, the figures show a worrying 9% year-on-year rise in the worst arrears band of 10% of more of the mortgage balance. The UK’s leading debt charity StepChange says while these numbers are small overall, the problem for affected households is severe.
Richard Lane, Chief Client Officer at StepChange Debt Charity, said: “The decline in UK homeowner mortgages in arrears, coupled with the expected drop in interest rates today, offers some reassurance for homeowners. Yet the effect of high rates and wider cost of living pressures has had a serious impact on some households.
“Our data shows a huge jump in the average amount of mortgage arrears new StepChange clients are presenting with, which will make their debt problems much more difficult to overcome. For these mortgage holders the problem is acute, and with interest rates not expected to decrease as rapidly as they increased, more households are at risk of long-term financial hardship.”
The charity says that if you are struggling to keep up with your mortgage payments, or are concerned about debt, then Brits should reach out for assistance. Lane added: “Mortgage lenders are required to help borrowers facing challenges and might offer forbearance options. Additionally, StepChange provides free and impartial debt advice, including guidance on mortgage debt, for those who are struggling.”
How does it affect my debts?
Credit card rates are normally variable, which means they can change over time. Borrowing on credit cards has become more expensive over the last few years. Some are linked to the base rate, which means they are affected by any changes. If your rate is due to change, your card provider should give you 30 days’ notice. Interest rates on personal loans and car financing are normally fixed – but do check the terms and conditions of your agreement to be sure. Again, the rates on new loans are higher now compared to a few years ago, meaning it is now more expensive to borrow.
How does it affect my savings?
The benefit of interest rate rises is that the rate offered on your savings should rise alongside it. After a sticky start – and a government grilling – banks started to raise interest rates offered on savings, and currently, the top-paying accounts are paying higher than the rate of inflation.
As the bank has cut rates today, they are set to come down, so you will need to act fast to get the best one. Right now, cash ISAs pay more than easy-access accounts, and the best cash ISA rate is 5.16% from Trading 212. The best rate for normal easy-access accounts is 4.85% from Coventry Building Society and Chip.
Regular saving accounts pay even more than this – but you’re normally limited to how much money you can save each month. For example, Principality Building Society pays 8% fixed for six months on up to £200 a month. First Direct also has a linked saver that pays 7% fixed for one year, but you can only deposit up to £300 each month. When it comes to savings, you should also make sure you’re protected by the Financial Services Compensation Scheme (FSCS), which covers up to £85,000 of your cash.
In response to today’s decision, John Dentry, Product Owner of the Current Account Switch Service at Pay.UK, said that while the implications of today’s decision may not be felt immediately, there will be important considerations for consumers going forward. He said: “As the base rates falls, so too will rates on both current accounts and savings accounts, which may motivate consumers to scour the market in search of higher returns. With our latest figures revealing that well over a million switches took place in 2024, a year in which rates were cut for the first time since 2020, the appetite for switching is clear.
“However, it isn’t just interest rates consumers should have in mind. Everyone has individual needs and financial goals, and finding the right bank account is essential to effectively managing your finances. Whether it’s cash incentives, spending benefits or improved mobile apps, banks are constantly refining their offers to attract new customers.
“With further cuts looking likely this year, there is no better time than the present for consumers to ensure their bank account works for them. For those thinking about making a change, it can pay to consider switching.”
