Bank of England reduces base rate to 4.25%: how could this effect UK mortgages?

The Bank of England has voted to reduce the base rate by 0.25% for the second time this year, taking it to 4.25%.

The Bank has regular committee meetings to decide what should happen to interest rates. The aim is to keep on track with inflation targets and maintain a healthy economy. Inflation is currently at 2.6%, which is still above the 2% target the government sets for the Bank.

What’s happened to mortgage rates recently?

Mortgage rates have continued to come down slowly in recent weeks. Depending on the loan to value and style of product will determine how much the product percentage is affected.

What does the reduction to base rate mean for my 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, it is likely you will notice a reduction to your payments. Each mortgage lender has their own policy as to how much and when they pass on the rate cut but typically it is within one month and communication is always sent in writing to you.

If you are in the process of moving or remortgaging, you may have already received a mortgage offer and have not yet completed. It is definitely worthwhile reviewing the options and depending on your situation and the timescales involved, you could benefit from a new product on a lower rate.

If you’re coming to the end of your fixed-rate product, you’ve probably already started to think about the rate you’ll be offered on your next deal. You want to avoid reverting to the lenders standard variable rate (SVR). Most lenders will allow you to secure a new rate within four months and you can even make changes should further rate reductions occur prior to completion.

Will the Base Rate reduction affect affordability?

If you’re thinking of moving home, you may see changes to lenders affordability assessments.

Lenders’ ‘stress test’ calculations – which is how they calculate whether someone can afford a mortgage should their repayments increase are usually linked to the variable rate – typically with 1% added on top. Therefore, if the variable rate reduces following the base rate cut, we might start to see affordability assessments improve and therefore the potential loan amount you can borrow increases.

What could happen next?

History has shown that after interest rates have increased over time, they have remained stagnant before starting to reduce. While we are seeing a gradual downward trend, it is extremely unlikely that rates will drop back to the historic lows we saw back in 2021.

The financial markets have been forecasting two-to-three more possible cuts during 2025, so we could expect the base rate to fall to 3.75% by the end of the year. However, we need to be patient and wait for the respective committee meetings which are planned for the rest of the year and see what happens in the wider economic conditions and global events. The next decision on interest rates is expected on 19th June.