Millions of mortgages bills to FALL as Bank of England interest rate decision confirmed – what it means for you

MILLIONS of mortgage bills are set to fall after the Bank of England confirmed a cut to interest rates.

During today’s meeting of the Monetary Policy Committee (MPC), the BoE’s ratesetters reduced the base rate from 5% to 4.75%.

The base rate is used by lenders to determine the interest rates offered to customers on savings and borrowing costs including mortgages.

This reduction means that millions of mortgage holders are set to see their bills fall.

It’s only the second cut since 2020.

Interest rates have risen from historic lows of 0.1% in December 2021, and peaked at 5.25% in July 2023, as part of efforts to reduce inflation to the Bank’s 2% target.

This led to a sharp increase in mortgage costs for millions of households, adding thousands of pounds to some bills, though savers saw returns on their savings go up.

The Bank of England made its first cut since 2020 from 5.25% to 5% in August.

The cut came after months of inflation falling from a record high of of 11.1% in October 2022.

Inflation is a measure of how prices for everyday goods like food and clothing have changed compared to last year.

The BoE then held the key rate at 5% in its meeting in September.

Since then, official figures published in October showed that inflation fell to 1.7%, its lowest level since April 2021.

The latest MPC meeting comes after Rachel Reeves announced nearly £70billion in additional spending during her Autumn Statement.

The Office for Budget Responsibility (OBR) indicated that this sharp increase in spending will contribute to higher inflation in the coming months, although it will also help drive stronger economic growth.

It forecasts that inflation will average 2.5% this year and 2.6% next year before decreasing, assuming the Bank of England takes action to help bring it to the target rate.

This has led economists to predict that there will be fewer rate cuts than previously expected over the next year.

Markets are pricing fewer than four quarter-point cuts up to the end of 2025, down from a little under five prior to the Budget.

In the meantime, if banks and building societies pass the latest base rate cut on to consumers, it spells good news for borrowers, such as homeowners, who could see a reduction in mortgage rates.

However, it also means that savers might experience a decrease in the interest earned on their savings.

Here, we explain what today’s rate drop means for your finances.

MORTGAGES

If interest rates fall, mortgage rates typically follow suit.

That’s because the base rate is used by lenders to set the interest rates they offer customers on savings and borrowing, including mortgages.

However, the timing of when you will see the reduction depends on the type of home loan you have.

Those on tracker and standard variable rate (SVR) mortgages usually experience an immediate change in payments, or very shortly after.

There are 643,000 customers on tracker mortgages and 624,000 on SVRs.

According to TotallyMoney, today’s 0.25% rate cut will save homeowners with an average tracker mortgage £32 a month or £382 a year.

The average standard variable tariff rate is 7.95%, although these are among the priciest rates on the market.

However, those on fixed-rate mortgages won’t see any changes until their deals end and they take out a new one.

The vast majority of mortgage holders, almost 7million, are on fixed deals.

Around 700,000 fixed-rate mortgage deals are due to end in the second half of this year, according to UK Finance.

When rates surged above 6%, borrowers on fixed-rate deals encountered substantial mortgage payment hikes upon remortgaging.

Higher fixed rates also made it more challenging for first-time buyers to enter the property market.

However, the average two-year fixed-rate deal is continuing to decline.

According to MoneyFactsCompare.co.uk, a typical two-year fixed rate in November 2022 was 6.47%, but it has now fallen to 5.39%.

Unfortunately, brokers do not think rates will ever return to record lows of 1 or 2%. 

Rachel Springall, finance expert at MoneyFactsCompare.co.uk, said: “Borrowers who are due to come off a cheap fixed rate deal will be on tenterhooks for mortgage rates to drop before they refinance, but if they have some months ahead to wait, it may be wise to consider overpaying.

“Over the course of the past 12 months, mortgage rates have been coming down and the average two-year fixed rate has dropped by almost 1%.

“The incentive to switch away from a SVR remains prevalent, as on average the rate sits just shy of 8%.

“A typical mortgage being charged the current average SVR of 7.95% would be paying £403 more per month, compared to a typical two-year fixed rate.”

CREDIT CARDS AND LOANS

If the base rate is lowered, the cost of borrowing through loans, credit cards and overdrafts can also fall.

However, certain loans, such as personal loans or car financing, usually stay the same, as you have already agreed on a rate.

However, you may be charged a lower rate on a future loan, and lenders may drop the rate on credit cards and overdrafts.

Your lender will let you know before making any changes. 

SAVINGS RATES

Savers have been the primary beneficiaries of rising interest rates.

This is because banks often compete to offer market-leading rates, although they can be slower to pass these benefits on to customers.

However, if interest rates fall, it could spell bad news for those with savings.

Banks and building societies have been preparing for future rate cuts and have already started cutting rates in recent months.

According to Moneyfacts, the average easy-access savings account rate in November 2023 was 3.19%, compared to 3.03% today – down from 3.15% in August.

Not all savings account rates will fall immediately, though, so you could still lock in a good deal now.

You can shop around for the best savings rates by using price comparison sites like Compare the Market, Go Compare, and MoneySuperMarket.

PENSIONS

The BoE’s base rate also impacts pensioners looking to buy an annuity.

A pension annuity converts your pension pot into a guaranteed regular income for the rest of your life.

But because annuity rates are linked to the cost of Government borrowing, any rise or fall in the BoE’s base rate can have an impact on the rate you receive.

The income you receive can be locked in on the day you purchase your annuity, so current annuity rates can make a big difference to your long-term financial security.

With interest rates going down, pensioners may be able to secure less favourable rates.

But it’s important to make sure you are getting the best deal before making any rash decisions.