As most analysts had predicted, the Bank of England has reduced its base rate by 0.25% today down to 4.5%, with better mortgage rates now on the table.
The first interest rate cut of 2025 came as no surprise to most financial institutions and lenders, many of which had already begun to adjust their products accordingly.
This brings the Bank of England base rate down to its lowest level in 18 months, with the decision driven by pressure to provide relief for borrowers, while inflation also fell slightly in December to 2.5%, coming slightly closer once again to the government’s 2% target.
News of the base rate cut came alongside the Bank of England downgrading its economic growth forecasts for 2025, with just 0.75% growth now predicted for the year ahead instead of the 1.5% forecast made in November. It also expects inflation to remain a sticking point, saying it could spike to 3.7% by autumn this year.
Despite the more downcast economic outlook, the latest decision is expected to be welcomed by borrowers, encouraging more confidence and activity in the UK property market with cheaper mortgage rates potentially on the cards.
Bank of England governor Andrew Bailey 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.”
Mortgage rates improving
The likes of Halifax, Barclays, HSBC and Clydesdale Bank or just some of the lenders that have slashed their rates over the past few days, while landlord lenders like Accord and Molo have reduced rates on their buy-to-let products.
However, the vast majority of borrowers opt for fixed rate mortgage deals, meaning that any immediate effects of the base rate reduction will not be felt by the majority. But those who are looking to remortgage soon, or take out new borrowing, may find more competitive rates and deals among lenders as the backdrop has shifted.
Those on variable or tracker rates, on the other hand, which tend to be linked to the base rate, are more likely to see an immediate reduction in their interest rate off the back of the Bank of England’s latest decision. This could mean an instant improvement in monthly outgoings.
However, lenders’ standard variable rates (SVR) tend to be significantly higher than fixed rate options. The latest data from Moneyfactscompare revealed that the average SVR is now 7.78%, down from 8.17% a year ago – but the average two-year fixed rate is now 5.52%, while the average five-year fixed rate is 5.32%.
The difference in rates between two-year and five-year deals is also uncharacteristically close, making many borrowers question whether to lock in for five years of certainty, or go for a shorter two-year deal in the hope of an improved set of options at the end of the term.
John Fraser-Tucker, Head of Mortgages at mortgage broker Mojo Mortgages explains: “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.
“But let’s be clear – this isn’t a magic solution. Mortgage rates are still higher than the rock-bottom levels we saw a few years back, and the housing market remains complex.
“My advice? Don’t just sit on this news. Speak to a mortgage broker who can break down exactly what this means for your specific situation. Every mortgage is different, and personalised advice is key.”
Bank of England decision ‘renews optimism’ for investors
Commenting on today’s Bank of England interest rate drop, Daniel Austin, CEO and co-founder at ASK Partners, said: “The Bank of England’s decision to lower interest rates to 4.5% marks a pivotal moment for the UK real estate market.
“While this move may provide some relief for borrowers, the broader impact will depend on how quickly lenders adjust mortgage rates and how sustained the rate-cutting cycle becomes. For homeowners and prospective buyers, lower rates should, in theory, make mortgages more affordable.
“However, the current market dynamics, where fixed mortgage rates have remained elevated despite previous signs of easing, suggest that any immediate impact may be muted. That said, a more stable rate environment could help restore buyer confidence, particularly among those who had been waiting for clarity before entering the market.
“For investors and developers, the trajectory of rate cuts will be crucial. With inflation now closer to the Bank of England’s 2% target, there is renewed optimism that financing conditions will improve, unlocking capital for new developments. Demand remains strong, particularly in sectors like co-living and build-to-rent, where supply constraints continue to drive investor interest.
“As we approach a potential shift in government policy and economic strategy, real estate stakeholders should remain agile. If rates continue to fall towards 3.5% by year-end, as some predict, this could fuel a more sustained recovery in transaction volumes and investment flows. However, uncertainty remains, and prudent financial planning will be key as the market navigates this transition.”
