Bank of England base rate held at 5%: what does this mean for mortgages?

Adapted from a Zoopla article by Nic Hopkirk 19 September 2024

The Bank of England has held the base rate at 5%, yet 5-year, fixed rate deals are falling to the lowest levels seen in two years. Find out what this could all mean for mortgage rates.



What’s happened to the base rate?

The Bank of England has held the base rate, following last month's drop to 5% from 5.25%.

The base rate held at 5.25% for 11 months prior to last month's cut, having risen rapidly from a low of 0.1% in November 2021.

Higher base rates were needed to control inflation, which reached 10% in early 2023 and is currently hovering at 2.2%, just above the Government’s target of 2%.

The decision to hold the base rate, rather than increase it, will be welcome news for businesses and households alike, as it’s a sign that borrowing costs are not likely to increase.

As we look to next year, city economists are forecasting that it’s likely the base rate will fall to 4% by the end of 2025.

What does the base rate hold mean for mortgages?

The cost of a mortgage is not directly set by the Bank of England official base rate. Lenders mainly source their finance for fixed rate mortgages in the money markets.

The cost of this money is influenced by the expected direction of base rates, among other things.

Most borrowers using a mortgage to buy a property are on fixed rate loans for 2 or 5 years.

In the days leading up to the base rate announcement, two-year swap rates, that's the rates at which banks borrow money, started to drop from 4.3% to 4%.  Five-year swap rates dropped from 3.9% to 3.7%. The situation has been improving for fixed mortgage rates too.

The latest Bank of England data for a five year fix 75% LTV has fallen to 4.3%, the lowest level seen in the last 2 years.

Based on current predictions, the mortgage rate forecast for 2025 is that rates will continue to go down, falling to around 4% by the end of next year.

Zoopla’s Director of Research and Insight, Richard Donnell, says: “There is a mix of hope and expectation that average mortgage rates starting with a 3 will become the norm at some point soon, supporting those refinancing and breathing more life into the sales market by supporting home buyers.

“The underlying cost of finance for fixed rate loans has fallen in recent months as expectations for base rate cuts ebb and flow.  This means average mortgage rates of 4-4.5% for a 5 year fix.”

But to help buyers, mortgage stress-testing needs to come down from around 8% to 6%.

“While the 'pay rate' for loans is falling, affordability stress tests continue in the background,” says Donnell. “This used to be 3% over the Standard Variable Rate and is now 1% over the revert rate once the initial deal comes to an end.

How will the base rate holding impact home buyers and the housing market?

The housing market is steadily adjusting to higher mortgage rates, with the worst of the impact felt in 2023.  2024 got off to a good start: households that put decisions on hold last year have returned to the market knowing that base rates aren’t going to rise any higher.

“The housing market is on track for 10% more homeowners moving compared to last year, and Zoopla expects average house prices to be 2% higher by the end of the year,” says Donnell.

"A key sign of confidence returning to the sales market is that buyers are paying almost 97% of the asking price. This is the highest it’s been for 18 months..

"Mortgage rates of 4-5%, while higher than the ultra low rates of 2019-2021, are becoming more manageable for home buyers. This is demonstrated by more sellers and more sales being agreed.

"Further growth in household incomes will help improve affordability, especially as we expect incomes to rise faster than house prices over the next 18 months."

What’s the impact on the mortgage market?

The mortgage market remains very competitive with lenders offering a wide range of mortgage deals for all types of buyer. Rates are changing all the time and responding to the outlook for the cost of borrowing.

If you’re looking to take out a new mortgage within the next six months, you can lock in the best rates available today.

When booking in a new mortgage deal, you can approach individual banks and building societies to find out their best rates. Or, you can work with a mortgage broker who will scour the market to find the best deals available to you. And if mortgage rates drop between now and the time your deal is due to start, you can ask your broker to rescan the mortgage market for you.

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