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.
Seven members of the nine-strong MPC voted to cut the base rate by 0.25%, while the remaining two members pushed for a more substantial reduction of 0.50% to 4.25%.
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.
Inflation, which tracks the rate at which prices rise across the economy, has significantly declined to 2.5% per year compared to the highs of recent years.
However, concerns are emerging that it may be starting to rise once again.
At the same time, economic growth in the UK remains sluggish.
The Bank of England has said it expects the UK economy to grow by 0.75% in 2025, down from a previous forecast of 1.5%, before accelerating in 2026.
Lowering the base rate is intended to encourage greater spending and investment, providing a much-needed boost to the economy.
However, the Bank’s forecasts now suggest inflation is rising again, to a higher-than-expected peak of 3.7% later in the summer.
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.
Andrew Bailey, governor of the Bank of England, said: “It will be welcome news to many that we have been able to cut interest rates again today.
“We’ll be monitoring the UK economy and global developments very closely, and taking a gradual and careful approach to reducing rates further.
“Low and stable inflation is the foundation of a healthy economy and it’s the Bank of England’s job to ensure that.”
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 (including today) in total, bringing them down to 4%.
Chancellor, Rachel Reeves said: “This interest rate cut is welcome news, helping ease the cost of living pressures felt by families across the country and making it easier for businesses to borrow to grow.
“However, I am still not satisfied with the growth rate.
“Our promise in our Plan for Change is to go further and faster to kickstart economic growth to put more money in working people’s pockets.
“That’s why we are taking on the blockers to get Britain building again, ripping up unnecessary regulatory barriers and investing in our country to rebuild roads, rail and vital infrastructure.”
YOUR QUESTIONS ANSWERED BY THE GOVERNOR
BANK of England Governor Andrew Bailey answers Sun readers’ questions…
Q There are plenty of warnings that the Budget will cause inflation to rise – supermarkets are already saying they will raise prices. After the Bank was slow to react to inflation before – why don’t you act pre-emptively this time to avoid more hardship?
A We do expect some increases to inflation in the coming months, but by much less than the spikes caused by Covid and the Russian invasion of Ukraine.
The reason for this increase is higher gas prices this winter and some higher utility bills. But we do think inflation will to return to our 2% target – that’s good news.
However, we need to make sure it stays there sustainably so we’re being gradual and careful in our approach to further rate cuts.
Q Is there a risk that interest rates could go back up?
A We don’t expect rates to go back up in the foreseeable future. We also want to avoid having to raise rates again and make sure we meet the 2% target consistently over time.
So we will set interest rates to make sure inflation stays low and stable whatever happens.
We need to be careful though. Cutting interest rates too fast or by too much could undermine the good progress we’ve made getting inflation down over the past couple of years.
Q When will my mortgage become cheaper?
A We’ve raised interest rates in the past so that we can meet our inflation target. This can affect the economy in a number of ways and one of those is higher mortgage payments for homeowners. When we raise interest rates we’re very conscious of the impact it has on them.
But we’re also pleased to see higher interest rates doing their job and inflation has fallen a lot since its peak in 2022. This has meant that we’ve now been able to cut rates three times since last summer, including today. This has caused mortgage rates to fall.
Q What’s the point of tinkering with measly 0.25 per cent interest rate changes? Especially when it takes a long time to feed through to the economy because of fixed mortgages?
A 0.25% changes in our official interest rate – what we call the “Bank Rate” – might seem small. But in one way or another they affect every household and business across the economy. And those changes can add up in a big way.
But there is a lot of uncertainty in the world at the moment. This means we have to take a gradual and careful approach to cutting rates.
Q Are you worried about Donald Trump launching a global trade war? What would it mean for the UK economy?
A As this week has demonstrated it is important to see where the policies of the new US Administration settle. What happens in the rest of the world matters a lot and we’re watching what’s going on very closely. That said Britain has a long and very proud history of free trade.
We’ll have to see how things pan out and react flexibly to global developments as they happen. What I can say with confidence is that we will do whatever is needed to make sure inflation is on track to meet the 2% target.
Q If growth is already below expectations, could you make it easier for firms to grow by cutting interest rates faster?
A Disappointing growth is something we’re seeing in lots of countries at the moment. In fact, it’s been a problem around the world since the financial crisis fifteen years ago.
The Government has an aim to boost growth. We support them in this endeavour, just as we did the previous Government. The best thing we can do to support the economy is to ensure low and stable inflation. You can’t have a strong economy without that. Cutting rates by too much now would just mean higher inflation and higher interest rates further down the line. That wouldn’t help anyone in the long run.
Q Do you think the Bank would benefit from more real world and business experience rather than just academics?
A The staff of the Bank come from a broad range of backgrounds. It’s not just full of academics – although we do need some of them too!
What’s really valuable is our network of Agents all across the UK who meet with thousands of businesses every year to find out what’s really going on. We can’t just pour all over the official economic stats – we need to have our ears to the ground too.
And on top of that one of the most enjoyable parts of my job is spending time with businesses all around the country. In fact, I’ll be doing that next week on my visit to Wales.
Q Do you think the 2 per cent inflation target could or should be widened or reformed?
A This has been considered over the years. My view is that the current target has helped maintain largely low and stable inflation for nearly 20 years so any changes would need to be carefully considered.
Q The Bank’s role is to manage inflation through monetary policy, but the Government’s fiscal policy including tax changes impacts inflation. Shouldn’t the two work closer together?
A I think the framework works very well. The Government and the Bank both serve the people of the UK but we have different specified objectives.
The Bank targets inflation using monetary policy. It is important that we are independent but accountable for that objective. While the Government raises tax revenues to spend on its fiscal priorities.
But that doesn’t mean that we work in isolation of each other. We’re in close touch, just as you’d expect.
Q The Bank seems to say that inflation is caused by Brits having better wages, but we need to earn more to afford our mortgage payments which have become more expensive because you have raised interest rates. Will the Bank only be content when unemployment and house repossessions shoot up?
A The big spike in inflation was caused by the pandemic and war in Ukraine – not by anything else. We take the impact of our decisions very seriously as we know they have a big impact on people’s lives.
No one gains from high inflation. The people who lose the most are those who can least afford it – on low incomes or in insecure employment. That’s why we had to raise rates to get inflation back down.
Inflation has fallen a long way over the past couple of years and we’ve been able to start cutting interest rates again. By comparison with previous periods of high inflation, unemployment and home repossessions have stayed relatively low. That’s good news. Low inflation also supports the real value of people’s pay both now and in the future.
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, more than 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.
John Fraser-Tucker, head of mortgages at broker Mojo Mortgages, said: “The Bank of England’s base rate cut is good news for mortgage holders across the UK.
“This reduction means real, tangible benefits for homeowners. Variable-rate mortgage customers can expect to see their monthly payments drop.
“For example, for someone with a £200,000 mortgage over a 30-year period, this will be a predicted saving of £29 per month.
“Whilst this may not seem like a lot, it’s a saving of £10,440 over the full mortgage period.
“First-time buyers will also see some positives.
“Lower base rates are likely to result in slightly more attractive mortgage products, potentially improving affordability at a time when getting on the property ladder has been challenging.
“For those coming to the end of fixed-rate deals, now’s a good time to explore the market as lenders are likely to introduce more competitive rates.”
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.
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.
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.”
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: “Annuity rates are closely tied to government bond yields, which can be affected by interest rate changes.
“A reduction in the base rate may lead to lower bond yields, potentially resulting in less favourable annuity rates for retirees.
“Those approaching retirement should seek financial advice to assess the best timing for purchasing annuities and consider alternative retirement income strategies where appropriate.”
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 also feed inflation this year.
The Banks 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”.
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