MILLIONS of mortgage bills are set to fall after the Bank of England (BoE) slashed interest rates this afternoon.
During today’s meeting of the Monetary Policy Committee (MPC), the BoE’s rate-setters reduced the base rate from 4.5% to 4.25% – the fourth interest rates cut since 2020.
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The decision will result in lower mortgage payments for homeowners but could mean reduced returns for savers.
The base rate influences interest rates that lenders offer on savings and borrowing, including mortgages.
This latest reduction follows a previous cut in February, when rates were lowered from 4.75% to 4.5%. The MPC then held interest rates steady in March.
Five members of the Bank’s nine-strong MPC voted for the 0.25 percentage point cut today.
Two members voted to hold rates at 4.5%, while a further two called for a sharp cut to 4%.
Chancellor Rachel Reeves welcomed the cut and said: “This interest rate cut is welcome news, and the fourth since we came into government making it cheaper for businesses to borrow, reducing the cost of a new mortgage, making homeownership more accessible, car finance more affordable and easing the pressure on those paying off personal loans.”
The Bank typically raises rates to combat high inflation by discouraging spending.
However, with inflation falling to 2.6% in March, the MPC felt able to loosen monetary policy.
CPI inflation is now expected to peak at 3.5% in the third quarter, down from the earlier forecast of 3.7%.
It’s predicted to return to the 2% target by early 2027, sooner than previously expected.
However, the Bank’s decision to adjust its base rate isn’t solely driven by inflation.
Today marks the first time the MPC has met to set monetary policy since US President Donald Trump announced his “liberation day” tariffs last month.
While UK economic growth is forecast to be stronger than previously thought in 2025, it is expected to weaken in 2026 as the effects of tariffs on global trade take hold.
Cutting the base rate could help tackle this slowdown by encouraging more spending and investment, giving the economy a much-needed boost.
The Bank now projects GDP growth to average 1% this year, up from its February forecast of 0.75%, thanks to a stronger-than-expected start to 2025.
But, the 2026 growth forecast has been downgraded to 1.25%, compared to the earlier prediction of 1.5%.
It said US tariff plans and their impact on global trade will dent UK growth by 0.3 percentage points over the next three years.
Most of this impact is set to come from “lower US demand for UK exports” and weaker global activity, according to the Bank’s latest report.
It added that increased “uncertainty” over the trade policy is also likely to contribute to the downward impact on UK growth.
Today’s forecasts were based on tariff policies as of late April, including a 10% US tariff on most UK exports and a 25% tariff on cars and steel.
However, a trade deal between Britain and the US is expected to be announced later today, which could help ease some of these concerns.
Governor Andrew Bailey said: “Inflationary pressures have continued to ease so we’ve been able to cut rates again today.”
“The past few weeks have shown how unpredictable the global economy can be.
“That’s why we need to stick to a gradual and careful approach to further rate cuts.
Markets are currently pricing in three more cuts this year – which would take the base rate to 3.5% by the end of 2025.
While the meeting took place against a backdrop of global economic uncertainty,
Here, we explain what today’s rate drop means for your finances.
Millions will see mortgages fall
When interest rates fall, mortgage rates typically follow suit.
That’s because the base rate is used by lenders to set the interest rates they offer customers on savings and borrowing, including mortgages.
However, the timing of when you will see the reduction depends on the type of home loan you have.
Those on tracker and standard variable rate (SVR) mortgages usually experience an immediate change in payments, or very shortly after.
There are 591,000 customers on tracker mortgages and 540,000 on SVRs.
A 0.25% cut to base rates would mean an average SVR mortgage would fall by £170 a year, while those on tracker deals will see a £350 a year drop.
Most mortgage holders, more than 7.1million, are on fixed deals so they won’t see any change until their deal ends.
Over 1.6 million fixed-rate mortgages are set to end this year, according to UK Finance, with many homeowners likely to face significantly higher rates than they currently pay.
This is due to interest rates climbing to around 6% in recent years, and experts believe they are unlikely to return to the record lows of 1-2%.
However, research from Compare The Market suggests that 937,433 homeowners who took out mortgages in 2023 could see a reduction in their monthly payments.
This is because their two-year fixed-rate deals, which averaged 5.06%, are set to expire, potentially allowing them to secure better rates.
Currently, the average two-year fixed mortgage rate is 5.18%, and the five-year fixed rate averages 5.1%, according to moneyfactscompare.co.uk.
However, some lenders have recently been offering rates as low as 3.89%, providing substantial savings for borrowers for borrowers coming off higher-rate deals.
Guy Anker, mortgage expert at Compare the Market, said: “Our research shows average mortgage rates are lower than they were in 2023, so anyone coming off a two-year fixed-rate deal may find their monthly payment could fall if they shop around for a new deal.
“If your mortgage deal is set to end this year, it’s wise to consider your options now as you can sometimes lock into a new deal up to six months before it is due to start.
“While there will be exceptions, it is often cheaper to get a new deal than move onto your lender’s standard variable rate (which most fixes and tracers revert to).”
How to get the best deal on your mortgage
IF you’re looking for a traditional type of mortgage, getting the best rates depends entirely on what’s available at any given time.
There are several ways to land the best deal.
Usually the larger the deposit you have the lower the rate you can get.
If you’re remortgaging and your loan-to-value ratio (LTV) has changed, you’ll get access to better rates than before.
Your LTV will go down if your outstanding mortgage is lower and/or your home’s value is higher.
A change to your credit score or a better salary could also help you access better rates.
And if you’re nearing the end of a fixed deal soon it’s worth looking for new deals now.
You can lock in current deals sometimes up to six months before your current deal ends.
Leaving a fixed deal early will usually come with an early exit fee, so you want to avoid this extra cost.
But depending on the cost and how much you could save by switching versus sticking, it could be worth paying to leave the deal – but compare the costs first.
To find the best deal use a mortgage comparison tool to see what’s available.
You can also go to a mortgage broker who can compare a much larger range of deals for you.
Some will charge an extra fee but there are plenty who give advice for free and get paid only on commission from the lender.
You’ll also need to factor in fees for the mortgage, though some have no fees at all.
You can add the fee – sometimes more than £1,000 – to the cost of the mortgage, but be aware that means you’ll pay interest on it and so will cost more in the long term.
You can use a mortgage calculator to see how much you could borrow.
Remember you’ll have to pass the lender’s strict eligibility criteria too, which will include affordability checks and looking at your credit file.
You may also need to provide documents such as utility bills, proof of benefits, your last three month’s payslips, passports and bank statements.
Credit Card APRs could go down
When the base rate is lowered, the cost of borrowing through loans, credit cards and overdrafts can fall.
However, certain loans, such as personal loans or car financing, usually stay the same, as you have already agreed on a rate.
These cuts don’t happen as quickly as mortgage rates and we might need to see several rate cuts before they start to fall.
Also multiple factors influence credit card rates, and not all lenders may fully pass on the benefits of the rate cut.
Rachel Springall, finance expert at Moneyfactscompare.co.uk, said: “Lenders traditionally reassess the rates they charge on debts as a reflection of their attitude to risk, as when the risk of defaults is elevated, the cost to borrow would usually rise.”
Your lender will let you know before making any changes.
Rate cuts add pain for savers
While rate rises have been painful for borrowers, savers have benefited from them.
This is because banks tend to battle it out to offer market-leading rates.
That said, banks are usually much slower to pass on higher rates to savers.
When rates are cut it then in turn means lower savings rates.
Since May 2024, average rates for easy access and notice accounts have declined.
The average easy access rate dropped from 3.11% to 2.79%, while notice account rates fell from 4.27% to 3.78%.
Rachel Springall, finance expert at Moneyfactscompare.co.uk, said: “Saving little and often is the key to building a nest egg, but rate cuts can have a disastrous impact on the savings habit.
“Apathy can lead to savers making the wrong choices with their pot, such as leaving it in their existing current account or an account tied to it which pays a poor return.
“Those earning paltry rates are at risk of having the real value of their hard-earned cash depreciate in real terms, because their pot should instead be earning a rate that fends off the eroding impact of inflation.”
Around £280billion is sitting in accounts paying zero interest, the latest data from the Bank revealed earlier this week.
It’s a good time to review your finances and move any money sitting in zero-interest accounts to one offering a better rate.
How to find the best savings rates
WITH your current savings rates in mind, don’t waste time looking at individual banking sites to compare rates – it’ll take you an eternity.
Research price comparison websites such as MoneyFactsCompare.co.uk and MoneySupermarket.
These will help you save you time and show you the best rates available.
They also let you tailor your searches to an account type that suits you.
As a benchmark, you’ll want to consider any account that currently pays more interest than the current level of inflation – 2%.
It’s always wise to have some money stashed inside an easy-access savings account to ensure you have quick access to cash to deal with any emergencies like a boiler repair, for example.
If you’re saving for a long-term goal, then consider locking some of your savings inside a fixed bond, as these usually come with the highest savings rates.
Pensions
The BoE’s base rate also impacts pensioners looking to buy an annuity.
A pension annuity converts your pension pot into a guaranteed regular income for the rest of your life.
However, because annuity rates are linked to the cost of government borrowing, any rise or fall in the BoE’s base rate can impact the rate you receive.
The income you receive can be locked in on the day you purchase your annuity, so current annuity rates can make a big difference to your long-term financial security.
However, Holly Tomlinson at Quilter said: “Annuity rates are closely tied to government bond yields, which can be affected by interest rate changes.
“A reduction in the base rate may lead to lower bond yields, potentially resulting in less favourable annuity rates for retirees.
“Those approaching retirement should seek financial advice to assess the best timing for purchasing annuities and consider alternative retirement income strategies where appropriate.”
