The Bank of England has today voted by 5-4 to cut the base rate by 0.25 percentage points to 3.75 per cent, its lowest level in almost two years.
In what could provide a major boost to the housing market, widespread anticipation of the move and expectations of further cuts in 2026 had already sparked a mortgage war, with lenders including Santander, Nationwide, Barclays and NatWest already cutting their mortgage rates.
The Bank’s decision comes against a weakening economic backdrop, with inflation down again at 3.2 per cent and the economy contracting in October, increasing headroom for further rate cuts next year.
Rate could fall further
Jack Meaning, chief UK economist at Barclays, said the bank expects another 0.25 percentage point cut in March. However, a poll by Reuters suggests rates could fall even further. While most economists surveyed also expect it to fall to 3.50 per cent in the first quarter of 2026, others believed rates could bottom out at around 3.25 per cent later in the year, taking borrowing costs to their lowest level since before the post-pandemic rate-tightening cycle began.
This could lead to even steeper reductions in mortgage rates, especially as, at the same time, brokers say lenders are also reducing rates early to secure business in a quieter market.
Mark Harris, chief executive of mortgage broker SPF Private Clients, says: “Given how relatively quiet activity is with the usual pre-Christmas lull, we would expect to see a 3.49 per cent rate in late December or early January, particularly as falling inflation means another rate cut this year looks like a dead cert. It might take a little longer for five-year fixes to breach the 3.5 per cent barrier, but it could happen in the new year.”
Two-year fixed rates could dip below 3%
According to Simon Gammon, mortgage broker at Knight Frank Finance: “It’s possible we see two-year fixed rates dip below 3 per cent by the spring”.
And Shaun Sturgess, director at Sturgess Mortgage Solutions, added: “After a challenging 2025, this momentum is exactly what buyers and homeowners have been hoping for.”
Major boost for housing market in 2026
Evidence from previous easing cycles shows housing market activity typically increases once rates start to fall. A March 2024 analysis by CBRE found that UK house prices rose by an average of around 8 per cent in the year following the first base-rate cut in past cycles, excluding crisis periods.
Analysis of the effect of falling base rates on mortgage costs highlights the potential boost it could give to the housing market. Based on an average UK house price of around £285,000, and a typical purchase mortgage with a 25 per cent deposit, a buyer taking out a mortgage a year ago would have had monthly repayments of more than £1,300. If the Bank rate were to fall to 3.25 per cent, taking purchase mortgage rates into the low-3 per cent range, that monthly cost would be around £1,050, which is a reduction of around £270 a month, or more than £3,000 a year
Most mainstream forecasts currently point to modest house price growth in 2026. Nationwide expects prices to rise by between 2 and 4 per cent, while other forecasters, including Rightmove and Zoopla, have also pointed to low-single-digit growth as affordability improves. However, those projections assume the base rate only comes down slowly. If the Bank rate were to fall more quickly to 3.25 per cent, it could provide a major boost to the market.
