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

The Bank meets every six weeks to decide on changes in interest rates. With the aim of keeping inflation at its target and maintaining the health of the economy as a whole. It was announced in October that inflation had fallen to 1.7%, below the Bank’s government target of 2%.

Markets were widely pricing in an interest rate cut today as keeping rates on hold could have a negative knock-on effect on businesses and households in the long term.

What happened to mortgage rates recently?

We have seen mixed behavior from lenders in recent weeks, with some increasing their mortgage rates, others decreasing them. This is largely because we have seen a lot of movement in swap rates (the underlying costs of mortgages for lenders), which has forced some to reprice their products to bring it back into line with the rest of the mortgage market.

You can check the Current average rates for a range of different deposit sizes here.

What do the experts think?

Our mortgage expert, Matt Smith, says: “This base rate decision comes at the end of a series of significant macroeconomic and political events on both sides of the Atlantic. All this has led to speculation that the base rate will be reduced at a more moderate pace than expected and has been priced in by lenders. So we will likely see average mortgage rates rise a bit in the short term, before starting to fall again.”

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

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

Changes to the bank’s base rate may affect the amount of interest you pay on loans, including mortgages. If you benefit from a fixed rate plan, your monthly payments will not change until the end of your contract. And if you have a tracker mortgage or an adjustable rate mortgage that tracks changes in the base rate, this month’s reduction in the base rate will mean your monthly payments will take care of that reduction.

If you’re nearing the end of your fixed-rate mortgage, you’ve probably already started thinking about the rate you’ll be offered on your next transaction.

If you’re planning to move soon, a good way to find out how much you could borrow is to use amortgage calculator. You can obtain a personalized result by requesting aMortgage in principlewhich will bring you closer to a mortgage offer.

In July 2023, theMortgage charter was launched to help those who are struggling to meet their monthly payments, as well as borrowers who will soon reach the end of their fixed rates.

The Mortgage Charter encourages lenders to be flexible and offers borrowers the opportunity to complete a new deal up to six months before their current rate ends. Of course, borrowers can also consider switching to another lender – commonly known as remortgaging – but this may take longer because you have to go through a normal loan process, like income checks, the legal process and perhaps an evaluation of your home.

This all takes time, and you’ll want to make sure you look around a few months before your current deal ends to avoid running into your lender’s standard variable rate – which will cost more than the repayments you’d have. have taken out a fixed-rate mortgage loan. The current SVR average is 8.01%.

What could reducing the base rate mean in terms of financial accessibility?

Lenders’ “stress test” calculations – which determine whether a person could afford a mortgage if their repayments increased significantly – are directly linked to the standard variable rates we just discussed above.

The “stressed rate” is generally the lender’s SVR, plus at least 1%. So, if lenders’ SVRs fall in line with this base rate cut, we could start to see affordability improve, as the stressed amount will now be lower than if the base rate was 5%.

You can find out more at 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 on whetherinterest rateshould go up or down, or stay the same.

History has shown that after increasing over time, interest rates remained stable before starting to decline. So, even though we are currently seeing the start of a downward curve, it is extremely unlikely that rates will fall back to the historic lows we experienced in 2021.

After the key rate cut in August, markets were potentially pricing in two further cuts before the end of 2024. However, due to other global events beyond the Bank’s control, this cut has now reverted to a single cut, which we I saw today. It is therefore unlikely that we will see a further reduction 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. But as always, this could change depending on developments in the broader economic environment.

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

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