What the UK’s Base Rate Cut to 4.75% Means for Mortgages
The Bank of England (BoE) has lowered its key interest rate to 4.75%, signaling a shift in monetary policy. For homeowners, this development raises important questions about how it will affect mortgage rates. While the base rate cut is likely to impact certain types of mortgages, it’s important to understand that lenders do not always adjust their rates in lockstep with the BoE's decisions, especially for fixed-rate mortgages.
The Base Rate and Mortgage Rates: What’s the Link?
The base rate set by the Bank of England influences the cost of borrowing for banks and other financial institutions. However, lenders do not automatically pass on the full impact of any rate changes to mortgage rates, particularly when it comes to fixed-rate mortgages.
Fixed mortgage rates are determined largely by long-term interest rate expectations and swap markets, which are financial markets where institutions can lock in future interest rates. These markets are driven by predictions about inflation, economic growth, and future central bank policies, rather than just the current base rate. As a result, lenders' decisions to adjust fixed-rate mortgages tend to be based on longer-term economic expectations rather than short-term shifts in the BoE's base rate.
For homeowners with a fixed-rate mortgage, the recent base rate cut is unlikely to result in an immediate reduction in your mortgage payments. You will continue paying the same rate until your deal expires or you decide to remortgage.
What About Tracker and Variable-Rate Mortgages?
For those with tracker mortgages or variable-rate mortgages (SVRs), the base rate cut is much more relevant. These mortgage types are directly linked to the BoE’s base rate, either through a fixed margin (in the case of trackers) or at the lender's discretion (in the case of standard variable rates). When the BoE cuts the base rate, the cost of borrowing for banks decreases, and many lenders will pass on that reduction to borrowers on these types of loans.
For example, if you have a tracker mortgage that is set at "BoE base rate + 1%" and the BoE reduces the rate by 0.25%, your mortgage payments could decrease by a similar amount. This will bring some relief to those with variable-rate mortgages, as their repayments will likely be lower following the BoE’s decision.
Why Fixed Rates Don’t Always Move with the Base Rate
So why don’t fixed rates immediately follow the BoE's base rate cut? The key factor is that fixed mortgage rates are more closely influenced by the cost of borrowing in the financial markets, particularly the swap market, rather than the base rate.
Swap rates reflect the cost for lenders of borrowing money over longer periods (typically 2, 5, or 10 years). These rates are influenced by investors’ expectations of future interest rates, inflation, and broader economic conditions. If investors believe interest rates will rise in the future, swap rates—and consequently fixed mortgage rates—will stay higher, even if the base rate falls in the short term. Conversely, if investors expect rates to stay low for an extended period, fixed rates may adjust downwards, but not immediately after a single base rate change.
For this reason, it’s unlikely that the recent 4.75% base rate cut will lead to an immediate drop in fixed mortgage rates. Instead, the adjustment (if any) will depend on how market expectations evolve in response to the overall economic outlook.
What Does This Mean for Homeowners?
For those on tracker or variable-rate mortgages, a lower base rate is a good sign. Many will see their monthly mortgage payments decrease, providing some relief as borrowing costs become cheaper.
For homeowners on fixed-rate mortgages, the immediate impact is limited. Fixed rates are based on longer-term market expectations, not the current base rate, so your payments will remain the same until your deal expires or you refinance.
For prospective buyers, a lower base rate may make some types of mortgages more affordable in the short term—especially trackers or variable-rate mortgages. However, fixed rates may not drop immediately, meaning buyers looking for certainty over their repayments might need to shop around for the best deal.
Should You Consider Remortgaging?
For homeowners approaching the end of a fixed-rate term or those considering remortgaging, now could be a good time to explore new deals, especially if your current rate is significantly higher than available offers. If you're on a variable or tracker rate, the BoE’s cut could lower your repayments, but it's worth considering whether your current deal remains the best option long-term.
In Summary
While the BoE’s decision to cut the base rate to 4.75% will provide some relief to borrowers with tracker or variable-rate mortgages, it won’t lead to an immediate reduction in fixed mortgage rates. Fixed rates are influenced by long-term expectations in the swap market and not directly by short-term changes in the base rate. Homeowners on fixed rates will see no change unless they remortgage, while those with tracker or variable-rate mortgages can expect lower monthly payments as lenders pass on some of the base rate reduction.
As always, it’s worth staying informed about the broader economic outlook and consulting with a mortgage advisor to make sure you're on the most competitive deal for your circumstances.