Categories
BoE Cuts Base Rate to 4.5% | What it Means for Your Mortgage
The Bank of England has reduced the base rate to 4.5%, and it's likely mortgage rates will follow suit.
The easing of economic policy over the past few months will certainly soften the blow for homeowners who have been locked into more expensive rates. Mortgage borrowers on tracker deals should see changes immediately, offering a welcome reprieve amid the ongoing cost-of-living pressures.
Mortgage borrowers on fixed-rate deals likely won't see any immediate changes. However, 1.8 million fixed-rate mortgages are due to end in 2025, and many lenders have already lowered their rates ahead of the bank rate announcement.
Affordability and high mortgage payments have prevented a number of first time buyers from getting on the housing ladder in recent years, so cheaper mortgages should lower the barriers of home ownership, as well as ease living costs for homeowners.
The bank rate has dropped by a total of 0.75% since last summer and is the lowest rate we've seen since May 2023.
Over the past two years, the Bank of England has taken a hawkish stance towards the base rate. But with inflation only 0.6% higher than the Bank of England's 2% target and a need to stimulate more economic growth, industry experts widely expected another cut.
In the first week of February, the government reiterated its commitment to economic growth, with Chancellor Rachel Reeves pledging to go "further and faster" in delivering a Plan for Change to stimulate business investment and household spending.
The economy is a key pillar of the new government's manifesto, and they are committed to convincing the public that they can deliver on this.
The UK economy has faced sluggish growth in recent months, with the latest figures showing a marginal 0.1% expansion in November. While the interest rate cut is intended to encourage borrowing and spending, economists remain cautious about the country's long-term growth, with one forecast suggesting the UK may see just 1% growth in 2025.
The base rate is the main way that the Bank of England controls inflation, so if inflation rises significantly, it's likely the bank rate would be increased again.
In 2024, mortgage rates fluctuated in response to bouts of economic uncertainty sparked by the Autumn Budget, overseas elections and other geopolitical influences.
It’s unlikely that interest rates will return to the uber-low levels we saw before 2022, but five-year fixes dropping consistently across the board is certainly a sign that there are more reductions to come.
In this article, our mortgage brokers weigh in on the discussion, and we analyse the bigger picture of the UK economy, inflation, and the mortgage market in this article.
See similar: Are Mortgage Rates Going Down?
Key Takeaways
- The Bank of England has reduced the base rate to 4.5% and mortgage rates may soon follow.
- Homeowners on tracker mortgages will see immediate reductions in payments, and fixed-rate borrowers are likely to benefit when their terms expire.
- Lower mortgage rates could ease affordability concerns, helping first-time buyers enter the housing market.
- The government remains focused on economic growth, with policies aimed at stimulating investment and spending.
What Do Our Experts Say?
George Abouzolof
Senior Finance Broker CeMAP
It’s possible that product rates will remain static during the New Year, but with the usual Christmas purchasing trends, it’s likely that inflation will climb higher.
The Autumn Budget announced a rollout of new government spending, which tends to drive up inflation and impacts mortgage rates.
It’s possible that the Bank of England base rate will be held after the next inflation announcement, and it’s unlikely it’ll be reduced further unless something in the market changes significantly.
I’m seeing less buy to let purchases since the Budget, which likely has a correlation with the new property tax hikes. Some landlords are leaving the market due to increased costs eating away at rental yields, but this could free up more housing stock for residential buyers.
Read blog: Should You Get a Tracker or Fixed Rate Mortgage in 2024? & Is Now the Time to Switch?
The graph below shows how the bank rate has increased since mid-2021.
(Credit: Bank of England)
It’s clear that inflation remains a central concern for the Bank of England. Maintaining a hawkish stance on the base rate continues the affordability strain prospective buyers have been experiencing, but it’s likely that house prices won’t jump significantly amid these concerns.
Future Projections for the Housing Market
Now that the bank rate is below 5%, it's likely that mortgage product rates will follow. It's possible that we won't see significant product rates drops initially, mainly due to the economic uncertainty presented by the recent Autumn Budget and the US Election.
It's common for several legislation changes at once to cause uncertainty, which impacts lender confidence and borrowing costs, but this is usually short-lived. Once the dust settles, mortgage rates will likely see further reductions, particularly if the Bank of England base rate drops again. For homeowners and prospective buyers, this should ease monthly payments and mortgage affordability.
And on top of this, the housing market is showing signs of recovery. Increased buyer activity and improved market sentiment have contributed to modest house price increases, though affordability remains a key challenge.
As winter approaches, expect continued steady growth in house prices, followed by the typical seasonal slowdown toward the end of the year.
Related: What is a Professional Mortgage and Can You Get One? & Spring Budget 2024: 5 Key Property Market Takeaways
Compare rates and get an instant quote using our online mortgage calculator
How Does Inflation Influence the Bank Rate?
The country is recovering from high inflation rates that led to an elevated cost of living in 2022. The Bank of England controls inflation primarily by adjusting the bank rate, which determines the cost of borrowing across the nation. Higher interest rates mean that borrowing is more expensive, which limits economic activity.
Reduced economic activity will typically cause inflation to fall. However, it's also important that inflation doesn't fall too low. If this does happen, people may put off spending en masse in hopes that prices will drop. When spending stops completely, whole systems and companies can come to a grinding halt.
The aim is to keep inflation low and stable.
How Did Inflation Get So High?
COVID-19 caused a shortage in products and services in 2020, and this demand led to increased prices. Then, Russia’s invasion of Ukraine impacted energy and food prices. Finally, it became evident in 2022 that thousands of people had left the workforce following the pandemic. This pushed up hiring costs, and many businesses subsequently raised their prices.
These three major hits to the economy contributed to the current cost-of-living crisis. Because major events have a relationship with inflation, the long-term view on inflation is never set in stone, but experts can make an educated guess with the data they do have.
Inflation is now below the BoE's target of 2%, which many feel is the primary reason the bank has lowered interest rates. Many experts expected inflation to jump up slightly in response to increased spending after the base rate was reduced to 5%, so it came as a surprise when inflation actually dropped below 2%.
Now that the base rate has been dropped again, many experts are confident that we'll see a slight uptick in inflation and there is room for further base rate reductions in the future.
How Can You Find an Affordable Mortgage in 2024?
Despite the optimism about declining mortgage rates, deciding on the best option can be daunting and confusing.
We can help you compare mortgage products and their costs to find the best deal for your specific situation from a wide range of lenders nationwide.
Expert mortgage advisors have a finger on the pulse of the latest mortgage market news. Whether you're a first-time buyer, looking to refinance, or investing in a buy-to-let, we can help you understand your mortgage options so you feel confident you're making the right choice.
To see what we can do for you, call us at 0203 900 4322 or book an appointment below.
