Base Rate cut to 4.5%: what it could mean for UK mortgages

Adapted from a Rightmove Property News article on February 6, 2025

The Bank of England has announced that it will reduce the Base Rate by 0.25%, taking it to 4.5%, in the first decision of the year. Base Rate was held at 4.75% in December after two cuts in 2024.

The Bank meets every six weeks to decide what should happen to interest rates, with the aim of keeping inflation to its target and keeping the wider economy healthy. It was announced that inflation was at 2.5% in the year to December, which is still above the 2% target the government sets for the Bank.

What’s happened to mortgage rates recently?

There has been marginal increases in mortgage rates in recent weeks, despite some lenders cutting rates across mortgage products. However, in the past week, the average rate for a 2-year fixed rate mortgage has fallen by 0.02% to 5% compared to a week ago, while the average rate 5-year fixed rate is now 4.79%.

What do the experts think?

Rightmove’s mortgage expert, Matt Smith, says: “The Bank of England (BoE) has kick-started 2025 with the first Base Rate cut of the year. The decision follows a weekend of unsettling news of tariff announcements from across the Atlantic, which will lead to caution from the Bank while it takes time to assess possible impacts. However, today’s cuts were still widely anticipated as the BoE takes slow and steady steps towards driving growth, amid sluggish inflation remaining above the 2% target since November.

“At the end of last year, the financial markets were forecasting four Base Rate cuts during 2025, but inflationary pressures have watered this down to two, or potentially three rate cuts of 0.25%, which could still see us closing out the year with Base Rate lowered to 4%, or further.”

With the early promising signs of home-mover activity we’ve been seeing since the start of this year, the outlook for borrowers remains stable.

Matt says: “While we’ve seen some mortgage rates rise in recent weeks, these have been mostly in the higher and lower loan-to-value ranges, and average mortgage rates are still below where they were when they spiked in January.

“Some of the major lenders have cut rates in recent days, and if the Base Rate continues to follow the expected downward trajectory in 2025, there will be some headroom for lenders to continue to slowly reduce their pricing. The UK mortgage market remains competitive, but headline rates will continue to be impacted by events both in the UK and overseas,” he adds.

What does the Base Rate reduction mean for my current mortgage?

Changes to the Bank’s Base Rate can impact how much interest you’ll pay on loans, including mortgages. If you’re on a fixed-rate deal, your monthly payments won’t change until the end of your deal. And if you’re on a tracker mortgage, or a variable rate mortgage that follows Base Rate changes, this month’s Base Rate reduction will mean your monthly payments will take on this drop.

If you’re coming to the end of your fixed-rate mortgage soon, you’ve probably already started to think about the rate you’ll be offered on your next deal.

What could happen next?

The Bank of England’s Monetary Policy Committee meets every six weeks to discuss and vote on whether interest rates should go up or down, or stay the same.

History has shown that after interest rates have increased over time, they have remained flat before starting to come down. So, while we’re now seeing the beginning of the downward curve, it’s extremely unlikely that rates will drop back to the historic lows we saw back in 2021.

After the Base Rate hold in December, the markets had been forecasting four potential cuts before the end of 2025. However, due to other global events which are outside the Bank’s control, this has now fallen back to a forecast of two to three 0.25% rate cuts, the first of which we’ve seen today.

So, we could see Base Rate fall to around 4% in 2025. Though as always, this could change depending on what happens in the broader economic environment.

The next decision on interest rates will be announced at midday on 20 March 2025.

The header image for this article was provided courtesy of Nick Griffith Estate Agents, Cheltenham

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