The Bank of England gave millions of borrowers an early Christmas present on Thursday when it cut interest rates from 4% to 3.75%. It is the fourth cut this year following reductions in February, May and August.
Will my mortgage get cheaper?
For the vast majority of borrowers the answer is no: more than 7.2m (86%) of Britain’s 8.4m existing residential mortgages are on a fixed rate, which means monthly repayments will stay the same.
However, the reduction will translate into lower borrowing costs for the 533,000 homeowners with a base-rate tracker mortgage. The rate they pay will fall, in line with the Bank’s cut. The banking body UK Finance reckons a typical tracker-mortgage customer (with an outstanding balance of £138,000) will see monthly payments fall by £28.77 as a result of Thursday’s decision.
The 509,000 borrowers on their lender’s standard variable rate (SVR) will have to wait and see. Although it is likely that lenders will reduce their SVRs, they are not obliged to do so. The average amount outstanding on an SVR mortgage is a lot smaller, so UK Finance estimates a typical saving of £13.88 a month if lenders follow the Bank’s cut in full.
About 1.8m fixed-rate mortgage deals are due to end in 2026. Depending on what happens with mortgage rates, many of those coming off five-year deals will probably still face a big jump in payments when they switch to a new product. However, lots of those coming off a two-year deal and switching to a new fixed deal will find themselves paying a lot less, as rates have come down substantially since early 2024 and look set to come down further over the next few months.
What about savings rates?
The returns on savings are not explicitly tied to the base rate, but Thursday’s reduction is likely to be passed on to many savers who have easy-access accounts or other accounts without fixed interest rates.
On Thursday morning, before the rate cut, the average easy-access savings rate was 2.56%. However, the “best buy” easy-access accounts pay a lot more than that – up to 4.5%, according to the financial data provider Moneyfacts.
Fixed-rate savings bonds involve tying up your money for between six months and five years, and typically offer some of the highest rates. On Thursday, the top one-year fixed-rate savings deals were paying a little over 4.5%.
What does the rate drop mean for new mortgage deals?
The cost of new fixed-rate deals has been on a gradual downward trend for a little while, and many brokers expect this latest cut to accelerate that, which is good news for homebuyers and those due to remortgage soon.
Simon Gammon, a managing partner at Knight Frank Finance, said: “Lenders have been trimming mortgage rates for several weeks, but today’s decision adds momentum to what we expect to be a highly competitive January.”
He said banks and building societies were likely to undercut one another to attract customers, adding: “It’s not impossible that we see two-year fixed rates below 3% by spring.”
The average new two-year fix is 4.82%, according to Moneyfacts, but the best two-year rates for those remortgaging and who have a lot of equity in their property are around the 3.6% mark. Someone who took out an average two-year fixed rate on sale in February-March 2024 had to pay about 5.7%, so it is possible some of those hopping on to a new two-year deal could end up paying a rate of perhaps half what they are on now.
Lorna Hopes, a mortgage specialist at the chartered financial advisers Smith & Pinching, said: “The biggest winners might be the thousands of people due to come off a two-year fixed-rate deal in 2026 – they should be able to remortgage onto a much lower rate.”
As things stand, those whose five-year fixed deal is due to end in the next few months will also benefit, but will typically still see their monthly payments rise sharply when they go on to a new product. The average five-year fix available to borrowers in March 2021 was priced at 2.75%, but some were able to obtain deals a lot cheaper than that. The average cost of a five-year fix today is 4.9%, though best-buy deals for remortgagers start at about 3.75%.
Mark Harris, the chief executive of the mortgage broker SPF Private Clients, said: “Those remortgaging in the next few months have a free throw of the dice, as rates can be booked up to six months before you need them. You can book a rate now and review prior to completion – if rates have fallen by then, you can enquire about switching to a lower rate. If not, you can keep what you have.”
