MILLIONS of mortgage bills are set to fall after the Bank of England confirmed a cut to interest rates.
During today’s meeting of the Monetary Policy Committee (MPC), the BoE’s rate-setters reduced the base rate from 4.75% to 4.5% – the third interest rates cut since 2020.
The BoE last cut rates from 5% to 4.75% in November 2024.
It then held interest rates at 4.75% in December.
The base rate is used by lenders to determine the interest rates offered to customers on savings and borrowing costs including mortgages.
This reduction means that millions of mortgage holders are set to see their bills fall.
However, it’s less favourable for savers, who can expect a drop in the interest rates on their savings accounts.
The BoE typically raises interest rates when inflation is high to discourage people from spending money, thereby slowing the rate of price rises.
Now, inflation – which measures how fast prices are rising across the economy – is much lower than the highs of recent years, at 2.5% per year.
At the same time, economic growth in the UK remains sluggish.
Lowering the base rate is intended to encourage greater spending and investment, providing a much-needed boost to the economy.
That said, recent announcements suggest inflation could begin to rise again, albeit at a more measured pace, which presents a potential challenge for the BoE as it balances its goals of price stability and economic growth.
The rise in cost inflation is partly to do with the effect of policies announced at the October Budget.
Chancellor Rachel Reeves raised national insurance contributions for companies in October.
The move was designed to give the Government more money to spend on public services like the NHS.
But some companies have complained it is pushing up costs and contributing to rising inflation.
Money markets now anticipate that interest rate cuts will proceed more cautiously than previously expected.
By the end of 2025, markets predict the BoE will reduce rates three times in total, bringing them down to 4%.
The Sun’s Biz Editor reports from BoE
By Ashley Armstrong, Sun Business Editor:
Fears about a weakening economy have nudged the Bank into its third rate cut to 4.5%.
However, before everyone gets carried away thinking that the Bank is now racing to lower rates Andrew Bailey’s comments about being “careful” should immediately temper that excitement.
Reading between the lines the Bank is saying that there are just so many swirling risks – ranging from Trump’s threat of trade tariffs to the global economy, a bounce back in inflation from higher energy prices and companies slashing jobs – that we shouldn’t bet on another cut next month in March.
In fact by the Bank’s own workings just under HALF of British households will still see an increase in their mortgage payments over the next three years.
Today’s rate cut was pretty much baked into market expectations.
But the world has changed significantly since the last time the Bank voted on interest rates in early December.
Since then a slew of economic data has shown weakening consumer spending and a slump in business confidence with firms cutting jobs and halting investment.
This has meant that even hawkish Bank members like Catherine Mann, who had voted aggressively for interest rate hikes on the way up, has switched her view and now worries that keeping rates too high will strangle the economy.
For the above reasons the Bank has lowered its growth forecasts for this quarter substantially from 1.4% to 0.4%.
For this year it predicts the economy will narrowly avoid a recession with growth of 0.75%, rather than the 1.5% expected.
The maximum growth expected is now forecast to be 1.8%, three years away.
It shows that the Bank has not been inspired by Chancellor Rachel Reeves’ recent rehash of long-term investment projects in Heathrow runways, reservoirs or a rail link between Cambridge and Oxford.
The Bank reckons the economy will only really see the boost from Labour’s growth mission after its forecasting period – after March 2028 when Britain heads to the polls again.
Meanwhile, inflation will shoot higher this year with the Bank now predicting the rate of price rises will reach 3.7%, rather than its 2.5% forecast in November, by this Autumn.
The Bank blames most of the inflation drivers on a surge in energy prices as expected in the looming hike in the household bills from the price cap.
An increase in bus fares, water bills and the introduction of VAT on private school fees also will feed inflation this year.
The Banks minutes say that there is a risk that the Chancellor’s Budget changes to employers’ national insurance contributions “is likely to be transmitted into higher prices, lower wages and employment” or reduced profit margins for firms.
The big unknown is the potential impact of US trade tariffs on the UK.
Around 22% of UK exports are sold in the US , equivalent to £190 billion of 7% of GDP.
However the bulk of these exports, 70%, are services such as consulting, and would not be hit by tariffs.
The Bank says there could be a wide range of outcomes including weakening demand for UK exports, supply chain disruptions, the pound weakening or strengthening.
The only thing that is crystal clear is we are not returning to an era of ultra low interest rates.
The Bank says unless there are new “disinflationary shocks [the base rate] is unlikely to fall back to its pre-pandemic lows”.
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 629,000 customers on tracker mortgages and 693,000 on SVRs.
A 0.25% cut to base rates would mean an average SVR mortgage would fall by £359 a year, while those on tracker deals will see a £206 a year drop.
Most mortgage holders, almost 6.8million, are on fixed deals so they won’t see any change until their deal ends.
More than 1.8million mortgages with fixed-rates are due to end this year, according to trade body UK Finance and the vast majority will face much higher rates than they are currently on.
That’s because rates have surged over the past couple of years to a high of 6% and unfortunately brokers do not think they will ever return to record lows of 1 – 2%.
At the moment, the average two-year fixed-rate deal is 5.52%, while the average five-year fixed rate is 5.32%.
Three-year fixes have seen a dip in rates too, so they are worth considering.
Four major lenders have already slashed their mortgage rates ahead of the BoE’s decision today.
Higher fixed rates also made it more challenging for first-time buyers to enter the property market.
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.
For example, last week First Direct announced that it will hike the interest rates offered on credit card purchases, balance transfers and cash withdrawals from April 15.
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.
On Saturday, Nationwide slashed rates on almost 90 savings accounts.
The Sun previously revealed that interest rates were slashed on over 200 accounts ahead of the New Year.
Average savings rates have been steadily declining over the past 12 months.
Average rates across easy access and notice accounts have fallen since the start of February 2024.
The average easy access rate has fallen from 3.17% to 2.92% today.
The average easy access ISA rate has also fallen from 3.3% to 3.06%.
Notice account rates have fallen from 4.3% to 4%.
Rachel Springall, finance expert at Moneyfactscompare.co.uk, said: “Savers who rely on their cash savings to boost their income are at the mercy of lower interest rates.
“It has already been proven that cuts to the Bank of England base rate set the wheels in motion for the biggest banks in the country to cut rates, showing loyalty does not pay.
“The biggest high street banks pay an average of 1.66% across easy access accounts, far less than the current market average easy access rate across all savings providers.
“In contrast, challenger banks have been working hard to entice new business, but they will not be able to escape making cuts if they sit too far ahead of their peers and the market sentiment for lower interest rates prevails in the months ahead.”
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: “High interest rates have supported better annuity payouts, but retirees should be aware that rate cuts could make annuities less attractive.”
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