The base rate has been cut to 4.75%: but what could this mean for mortgages?

The Bank of England announced it would cut its policy rate by 0.25% to 4.75% this month – its second cut this year. The base rate was maintained in September after being cut in August, the first fall since 2020.

The bank meets every six weeks to decide what should happen to interest rates. In order to keep inflation at the target level and preserve the health of the economy as a whole. In October it was announced that inflation had fallen to 1.7%, below the government’s 2% target for the Bank.

Markets today were widely predicting interest rate cuts as continuing to hold rates could have negative consequences for businesses and households going forward.

What’s happened to mortgage rates lately?

In recent weeks, we’ve seen mixed behavior from lenders, with some raising mortgage rates and some lowering them. This is largely due to the fact that we have seen significant changes in swap rates – the main cost of mortgages for lenders – which means some have had to re-price their products to get back in line with the rest of the mortgage market.

You can check current average rates for various deposit sizes here.

What do the experts think?

Our mortgage expert Matt Smith says: “This base rate decision comes at the end of a number of important macroeconomic and political events on both sides of the Atlantic. All this led to the view that the base rate would decline at a more moderate pace than previously expected, and this was taken into account by lenders. So we’re likely to see average mortgage rates rise slightly in the short term before they start to fall again.”

“Today’s decision is likely to help ease the pressure on lenders to raise rates, as we have already begun to see. If the last few weeks have taught us anything, it is that the UK mortgage market remains competitive, but overall prices will continue to be affected by developments both in the UK and overseas,” he adds.

What does the base rate reduction mean for my current mortgage?

Changes to the Bank’s base rate may affect the interest you pay on loans, including mortgages. If you have a fixed rate deal, your monthly payments will remain the same until the end of the deal. And if you have a tracker mortgage or an adjustable rate mortgage that follows changes in the prime rate, a reduction in the prime rate this month will mean your monthly payments will absorb that reduction.

If your fixed-rate mortgage is about to end, you’ve probably already started thinking about the rate you’ll be offered on your next deal.

If you’re thinking about moving home soon, a good way to find out how much you can borrow is to usemortgage calculator. You can get a personal result by leaving a requestMortgage in principlewhich will take you one step closer to your mortgage offer.

In July 2023Mortgage Charter was launched to help those struggling to meet their monthly payments, as well as borrowers whose fixed rates are about to end.

The Mortgage Charter encourages lenders to be flexible and offer borrowers the opportunity to negotiate a new deal six months before the current rate ends. Of course, borrowers can also consider switching to a different lender (commonly called a remortgage), but this may take longer as you will have to go through the normal lending process, such as income verification, a legal process, and possibly an appraisal of your property. house.

All of this takes time and you should make sure you look around a few months before the end of your current deal to avoid your lender switching to a standard variable rate which will cost more than the repayments you would have paid. made a mortgage with a fixed interest rate. The current average for SBO is 8.01%.

What might a base rate reduction mean for affordability?

Lenders’ “stress test” calculations—that is, how they calculate whether someone will be able to afford a mortgage if their payments jump significantly—are directly related to the standard variable rates we just discussed above.

The “stress rate” is usually the lender’s SVR to which a minimum of 1% is added. So if lenders’ SVR falls in line with this base rate cut, we could start to see an improvement in affordability as the stress amount will now be lower than if the base rate were 5%.

You can read more about How lenders calculate mortgage affordability Here.

What could happen next?

The Bank of England’s Monetary Policy Committee meets every six weeks to discuss and vote oninterest ratesshould go up or down or stay the same.

History has shown that after interest rates have increased over time, they have remained constant before beginning to decline. So while we are now seeing the start of a downward curve, it is extremely unlikely that rates will return to the all-time lows we saw back in 2021.

After the base rate cut in August, markets were forecasting a possible two more cuts before the end of 2024. However, due to other global events beyond the Bank’s control, this decline has now been reduced to one again, which is what we present. saw today. So it’s unlikely that we’ll see another cut before the end of the year.

We could see the base rate fall to around 4% in 2025, which would mean three more base rate cuts over the next year. Although, as always, the situation is subject to change depending on what happens in the wider economic environment.

The next interest rate decision will be announced at 12:00 on December 19, 2024.

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