Will a UK Interest Rate Cut Reduce Mortgage and Loan Costs?
In November 2024, the Bank of England reduced its base interest rate to 4.75%, following an earlier cut in August to 5%. These reductions mark the first downward moves in over four years.
Interest rates significantly impact mortgages, loans, and savings for millions in the UK. While these recent cuts may ease borrowing costs, many households still face financial challenges.
Understanding Interest Rates
Interest rates dictate the cost of borrowing and the returns on saving.
The Bank of England’s base rate is what it charges other financial institutions to borrow money. This rate influences the costs lenders pass on to consumers for mortgages and loans and affects the interest rates paid on savings.
- Raising rates: Helps curb inflation by discouraging spending.
- Lowering rates: Stimulates spending and investment, often to support economic growth when inflation is low or stable.
The Bank adjusts rates as part of its strategy to maintain inflation at its 2% target.
When Will Interest Rates Decline Further?
In 2024, the Bank of England cut rates twice, bringing them down to 4.75%. While this is a significant step, borrowing costs remain high compared to much of the last decade.
Inflation, which peaked at 11.1% in October 2022, has slowed to 2.3% as of October 2024. However, inflation remains above the Bank’s target, complicating the decision to reduce rates further.
Governor Andrew Bailey has emphasized that any additional cuts will be gradual to avoid a rebound in inflation.
How Low Could Rates Go?
The future trajectory of interest rates depends on inflation trends and broader economic factors. Recent government spending plans, outlined in the October Budget, have shifted expectations, with markets anticipating slower rate cuts.
Global factors, such as U.S. economic policies under President Donald Trump and increased business costs in the UK, could also influence the Bank’s decisions.
- How Do Interest Rates Impact You?
Mortgages
Tracker mortgages: Around 600,000 homeowners with variable-rate mortgages will see immediate reductions in repayments following a base rate cut. - Fixed-rate mortgages: The majority of borrowers—over 80%—have fixed-rate deals, which won’t change immediately but may benefit from lower rates on future renewals.
Fixed-rate mortgage costs remain high, with two-year deals averaging 5.39% and five-year deals averaging 5.09%. Many homeowners coming off older, lower-rate deals will face significantly higher payments.
Credit Cards and Personal Loans
The cost of credit cards, personal loans, and car financing is indirectly influenced by base rates. However, lenders tend to lower their rates slowly, often lagging behind Bank of England adjustments.
Savings
Falling interest rates can reduce the returns on savings accounts. Currently, easy-access savings accounts average about 3% interest annually. Rate cuts could particularly affect retirees and others who rely on savings interest for income.
How Does the UK Compare Globally?
Interest rate trends vary across major economies:
- Eurozone: The European Central Bank has lowered rates twice in 2024, bringing them to 3.5% in September.
- United States: The Federal Reserve has also reduced rates, with its key lending rate now at 4.5%-4.75%.
Despite recent cuts, UK rates remain among the highest in the G7, reflecting the challenges of balancing inflation control with economic growth.
What’s Next for Borrowers and Savers?
As the Bank of England cautiously evaluates inflation and economic growth, additional rate cuts are likely to be modest and gradual. Homeowners, borrowers, and savers should prepare for a period of steady but slow adjustments to financial conditions.