by Sam Akbay
Bank of England Cuts Base Rate to 4.75%: What Could It Mean for Mortgages?
In a move widely anticipated by financial markets, the Bank of England has reduced its Base Rate by 0.25%, bringing it down to 4.75%. This is the second rate cut of the year following an initial reduction in August, which was the first since 2020. The Bank’s primary goal remains to control inflation and stabilize the economy, with inflation recently falling to 1.7%—below the government’s 2% target.
With the Base Rate cut now official, what can homeowners and prospective buyers expect in terms of mortgage impacts? Here’s a breakdown.
Recent Mortgage Rate Movements
In recent weeks, mortgage lenders have adjusted their rates in response to fluctuations in swap rates, which influence the underlying costs of mortgages for lenders. Some lenders have raised rates while others have reduced them, aligning with shifts in the broader mortgage market.
The latest Base Rate cut may create more pressure for lenders to moderate these adjustments, helping to keep the UK mortgage market competitive. This reduction is expected to relieve some of the upward pressure on rates, even though recent trends show pricing can be impacted by both domestic and international economic events.
Insights from Experts
Market experts believe that while the Base Rate reduction may slow any immediate rate increases, borrowers shouldn’t expect a rapid fall in mortgage rates. According to Rightmove mortgage expert, Matt Smith, “The Base Rate cut is a measured response to a range of global economic factors. We expect average mortgage rates may remain steady or drift slightly higher in the short term before easing again.”
The UK mortgage market remains highly competitive, but borrowers should stay informed as even small rate shifts could impact their long-term costs.
How Will the Rate Cut Impact Your Mortgage?
For homeowners, the Base Rate reduction will have different effects based on the type of mortgage they hold:
- Fixed-Rate Mortgages: If you have a fixed-rate mortgage, your payments will stay the same until the end of your term, regardless of the Base Rate change.
- Tracker and Variable Rate Mortgages: Borrowers on tracker or variable rate mortgages that follow the Bank’s Base Rate should see a reduction in their monthly payments reflecting the 0.25% cut.
For those nearing the end of their fixed-rate term, this could be a favorable time to start exploring new mortgage options. A mortgage calculator or a Mortgage in Principle can help provide insight into potential borrowing amounts and repayment terms.
The Role of the Mortgage Charter
Introduced in July 2023, the Mortgage Charter offers flexibility for borrowers who may be facing financial pressures. Under the Charter, lenders are encouraged to allow borrowers to lock in a new deal up to six months before the end of their current rate. Additionally, borrowers can choose to remortgage with a different lender, though this process typically requires new income checks, legal processing, and potentially a property valuation.
It’s wise for borrowers to start researching options a few months in advance to avoid moving onto their lender’s Standard Variable Rate (SVR), which is often significantly higher than fixed rates. Currently, the average SVR is 8.01%, so planning in advance could yield substantial savings.
Affordability Impacts from the Rate Reduction
Lenders apply a “stress test” to assess affordability, which simulates whether a borrower could handle a significant rate increase. These stress tests are typically based on a lender’s SVR plus an additional percentage. If SVRs decrease in line with the Base Rate cut, some borrowers may find improved affordability as lenders’ stress rates are likely to be lower.
What to Expect Going Forward
The Bank of England’s Monetary Policy Committee reviews the Base Rate every six weeks, taking into account the current economic landscape and inflation trends. Historically, interest rates tend to plateau after a series of hikes before declining gradually.
Although further rate cuts are possible in the next year, experts don’t anticipate a return to the historically low rates seen in 2021. The market had initially anticipated two additional rate cuts by the end of 2024, but broader economic uncertainties now suggest this recent cut may be the last one of the year.
The Bank’s next interest rate decision will be announced on 19 December 2024. For now, borrowers should stay vigilant, monitor their mortgage options, and seek professional advice to navigate the evolving landscape.
