UK Mortgage Relief: The Timeline for Falling Interest Rates
The Bank of England has held its base rate steady at 4.75% in December, following two interest rate cuts earlier in 2024. While this has provided a glimmer of hope for borrowers, mortgage costs remain high for many UK homeowners.
The first drop in rates since 2018 came in August, reducing the base rate from 5.25% to 5%. A further cut in November brought it down to 4.75%. Experts predict the next adjustment may arrive in February 2025, but uncertainties around inflation and the economy could influence the Bank’s decision-making.
Understanding Interest Rates and Their Impact
Interest rates are the cost of borrowing money or the reward for saving it. The Bank of England’s base rate is the foundation for what lenders charge for mortgages, loans, and credit cards. It also dictates what savings accounts pay in interest.
The Bank adjusts rates to control inflation—the rate at which prices rise over time. High inflation prompts rate hikes to curb spending, while a drop in inflation often allows rates to be reduced to encourage borrowing and investment.
How Mortgage Rates Are Affected
Mortgage rates have yet to see significant relief despite base rate cuts. Currently, the average two-year fixed mortgage rate is 5.46%, while five-year deals hover around 5.23%, according to Moneyfacts.
For borrowers with fixed-rate mortgages nearing renewal, this creates a challenging scenario. Many homeowners who locked in deals at rates of 3% or lower face much higher costs when their fixed term expires.
Inflation and the Bank’s Next Steps
Inflation in the UK has dropped significantly from its October 2022 peak of 11.1%. By November 2024, it was at 2.6%, slightly above the Bank of England’s target of 2%.
The Bank is taking a cautious approach to cutting rates. Governor Andrew Bailey has emphasized the importance of gradual adjustments to avoid economic shocks and maintain stability
What This Means for Borrowers
Tracker Mortgages: Borrowers with tracker mortgages tied to the base rate will see immediate changes in their monthly payments.
Fixed-Rate Mortgages: For those with fixed deals, changes will only affect new deals or renewals. Fixed-rate borrowers should carefully evaluate their options as their deals approach expiry.
Loans and Credit Cards: While base rate reductions may eventually lower borrowing costs for personal loans and credit cards, these changes tend to lag behind.
Savings: A falling base rate could mean lower returns for savers.
The Global Perspective
While the UK’s rates remain among the highest in the G7, central banks globally are also cutting rates. In the eurozone, the European Central Bank (ECB) has reduced rates to 3%, while the US Federal Reserve has steadily brought its target range to 4.25%-4.5%.
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