On February 6, 2025, the Bank of England announced it had cut its base rate from 4.75% to 4.5% – the lowest base rate it had set since June 2023. The base rate reduction intends to boost spending and make borrowing money cheaper as the UK economy grapples with rising inflation.
What does it mean for mortgages? The news of a lower base rate was accompanied by an onslaught of headlines claiming that this is great news for current and potential mortgage holders, with interest rates set to plummet on mortgage deals, too. However, a month later, this isn’t strictly true for every mortgage out there. In this article, we’ll unpick what the Bank of England’s base rate drop really means for mortgage rates and what actually influences them.
What Is The Bank of England Base Rate?
Essentially, the Bank of England’s base rate is what it charges lenders to be able to borrow money so they can offer their services to customers. Think loans and mortgages. This can then influence the interest rates banks charge borrowers.
The Bank of England has eight meetings a year to discuss the base rate. In these meetings, they decide whether to drop it, increase it, or hold it to try to keep inflation under control. The target for inflation is 2%, and when inflation gets close to its target, the Bank of England might choose to drop or hold its base rate to keep it there. A lower base rate could have a positive knock-on effect for some mortgages but not all.
What Did The February 2025 Cut Mean For Mortgages?
News that the base rate had fallen to 4.5% left many wondering if their mortgages would get cheaper. There was plenty of speculation in the press, after all. The answer for most borrowers is that no, their mortgages won’t come down. Most people are on fixed-rate deals, which means their monthly payments will stay the same regardless of whether the base rate falls or rises.
Only homeowners on a base rate tracker mortgage will see the base rate reduction translate into lower monthly payments. People who have borrowed money from a lender at their standard variable rate (SVR) will have to wait and see what happens, as lenders aren’t obliged to cut their SVR just because base rates have gone down.
Some lenders may introduce lower mortgage rates for a short period to drum up business and keep the mortgage market competitive, but there’s no guarantee these rates will stick around for long.
What Actually Influences Mortgage Rates?
The Bank of England has some bearing on mortgage rates, but it’s not the only factor influencing whether rates go up or down. Other influential factors include:
- Swap rates: This refers to how much the lenders themselves pay to borrow money to give them a steady supply of funds to provide their services over a set period. Arguably, swap rates have a bigger influence on mortgage rates than the base rate. When swap rates are lower, mortgage interest rates tend to be, too.
- Inflation rates: Inflation refers to the rate at which the cost of services and goods has gone up over the course of the year. If inflation rises, interest rates might increase too to discourage further rises. This can have a knock-on effect on mortgage rates.
- Global economy and growth: The wider global economy and growth can have an impact on mortgage rates. The better the economy is doing, the better the rates.
- Property demand: Supply and demand play a part when it comes to mortgage rates. Rates can go up when there’s more demand for mortgages and go down when demand is low to encourage people to take out a mortgage.
Base Rate Forecast For The Rest Of The Year
The Bank of England meets every six weeks to discuss the base rate. The next meeting will be on March 20, 2025. Predicting what will happen and what this will mean for mortgages is difficult. Some forecasts indicate that the Bank of England will cut its base rate a further three times this year, with rates predicted to land at 3.75% by the end of the year. Others say only two more cuts will happen this year, which would mean the rate’s unlikely to drop below 4%. Of course, this is all speculation, and only time will tell if base rates fall again, hold, or rise.
If you need help understanding mortgage interest rates or finding a mortgage that works for you, our friendly and professional team is here to help.
