UK interest rates: What the latest cut means for mortgages and what you should do next

“This softening in rates, coupled with the recent push from the government to enhance mortgage borrowing multiples, will add stimulus to the housing market”

The latest fiscal easing by the Bank of England is certain to trigger even better deals for borrowers as more lenders look to offer mortgage rates below 4 per cent.

A cut in the official base rate to 4.25 per cent from 4.5 per cent will also come as welcome news to hard-pressed businesses, struggling with rising wage costs and economic uncertainty.

As had been widely anticipated, the central bank opted to trim interest rates by a quarter point at its latest rate-setting meeting, despite hopes among some for a larger half-point cut. Indeed, the Institute of Economic Affairs’ shadow monetary policy committee had voted to reduce the bank rate to 4 per cent just a day earlier.

The mortgage market has been heating up in recent months and the latest base rate cut is likely to stimulate further activity.

The Bank of England’s own nine-strong monetary policy committee (MPC) opted for a smaller cut in a majority 5-4 vote amid signs that inflation may be coming under control, though it remains above the bank’s longer-term 2 per cent goal.

Reassuringly, policymakers also predicted that the UK economy will grow by 1 per cent this year, up from a previous 0.75 per cent forecast on the back of a strong start to 2025. But, sounding a note of caution, the bank warned that US tariff plans and their impact on global trade will dent UK growth by 0.3 percentage points over the next three years, as it downgraded its 2026 forecast.

Mortgage holders on variable and tracker rates and those looking to remortgage will be hoping for some rapid relief. Some 1.8 million people have a fixed-rate mortgage expiring this year.

Despite recent reductions by lenders, the mortgage market will look significantly different for those coming off five-year fixed-rate deals.

Housebuilders and the housing market could benefit from lower interest rates.

However, there are several options now available at rates of 4 per cent or a little under for both two and five-year fixes, particularly those seeking lower loan-to-value mortgages at 60 per cent or below.

Mortgage experts said cheaper deals were on the horizon with the latest interest rate reduction likely to give lenders further impetus to trim rates.

Mark Ashbridge, managing director of Ashbridge Partners, said: “This softening in rates, coupled with the recent push from the government to enhance mortgage borrowing multiples, will add stimulus to the housing market. For example, Halifax’s recent changes to mortgage lending rules mean the maximum loan available to a typical customer could increase by as much as 13 per cent.

“For our more affluent clients they are typically grappling with the twin challenges of higher interest rates, once they fall off their historic 2 per cent fixes, along with the additional costs of VAT on school fees. Therefore, they might be more interested in converting their mortgage onto an interest only basis for the next period of two or five years whilst they reconfigure their cost base. In these scenarios achieving the absolute best rate in the market may become of secondary importance.”

As well as lowering interest rates, the Bank of England, above, issued new inflation and growth guidance.

Sarah Coles, head of personal finance at investment platform Hargreaves Lansdown, said: “This is more good news for remortgagers, whose growing sense of dread at the thought of a looming deadline will have been easing somewhat as rates have moved lower.

“The mortgage price war was already well underway before this announcement, as lenders priced in the expected cut. Lenders have been cutting rates across the board, and most lenders now offer sub-4 per cent deals.

“The fact there are more cuts expected later this year will mean there’s scope for them to move even lower. However, the bank has warned that cuts aren’t guaranteed, and a sizeable surprise from the other side of the pond still has the potential to set rates on a different course.”

Property experts believe that the interest rate cut could encourage more families in Scotland to upsize their homes.

Shawn Wood, head of conveyancing at legal firm Watermans, said higher rates had slowed appetite for people considering a move to bigger properties with bigger mortgages, but predicted that this would change if rates continue to fall. Analysts are predicting that the UK central bank will cut rates at least two more times this year. Five MPC meetings are scheduled before the end of 2025 - in June, August, September, November and December.

Wood said: “Good news is in short supply at the moment, so this could be enough to encourage people to make the move they want. If people get the feeling their finances might get a bit easier it’ll give them the confidence to make the step up.

“The flip side is there will be more competition for those homes between three and five bedrooms, which means higher prices. The old saying that if you’re not fast you’re last definitely applies here - if someone is ready to move they should crack on because we all know how quickly things can change.”

Inflation

Meanwhile, UK inflation is predicted to witness a shallower rise than previously expected. Consumer price index (CPI) inflation is on track to peak at 3.5 per cent in the third quarter of this year, on the back of rising energy prices. However, this is a reduction on the bank’s previous guidance that inflation would peak at 3.7 per cent.

Professor Joe Nellis, economic adviser at MHA, the accountancy and advisory firm, said: “It is no surprise that the Bank of England has cut interest rates, but it should have been bolder in its attempt to kick some life into the economy and actioned a double cut to 4 per cent. The bank has recognised that rising inflation - driven largely by regulated price increases - is a short-term issue.”

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