The Bank of England Cuts Base Rate: What This Means for You?
The Bank of England (BoE) has announced a reduction in the Base Rate to 5% this month, marking a 0.25% decrease and the first cut in four years. Since August 2023, the Base Rate had been held steady at 5.25% after 14 consecutive increases.
Why Has the Bank of England Cut Rates?
The BoE had been steadily raising and maintaining rates in an effort to combat soaring inflation, which had surged to over 10% in early 2023—significantly above the government’s 2% target. However, with inflation dropping back to the 2% target in June and remaining stable through July, the Bank has now decided to ease rates slightly.
In the run-up to the announcement, there was much speculation about whether the BoE would hold the rate steady or opt for a cut. Market predictions were evenly split between the two outcomes, reflecting the uncertainty in economic circles.
The debate centred around ‘service inflation’—the rising costs in sectors like hospitality and culture—which remained persistently high through June. This type of inflation differs from the more familiar rise in the cost of goods, such as those in your weekly shop.
The BoE’s challenge is to strike a delicate balance between controlling inflation and supporting the broader economy. This latest rate reduction suggests that the Bank believes its inflation-fighting strategy is on track. At the same time, they seem to recognise that maintaining high rates could have negative consequences for both businesses and households in the long term.
What’s Been Happening with Mortgage Rates?
Earlier in the year, we witnessed an unexpected spike in inflation, which led to mortgage rates creeping up throughout the spring. However, with the recent good news about inflation returning to the 2% target, mortgage rates have begun to stabilise.
In the past few weeks, mortgage rates have started to fall more noticeably, driven by the certainty brought by a new government and increased competition among lenders. For the first time in many months, we’ve seen sub-4% rates reappear for borrowers with larger deposits, and it’s likely that more lenders will follow suit in the coming weeks.
Currently, the average 5-year fixed rate has dropped from 6.08% in July 2023 to 4.87%, while the average 2-year fixed rate has decreased from 6.61% to 5.25%.
Expert Insights on the Base Rate Cut
The much-anticipated Base Rate cut has finally happened. While those looking to take out a mortgage soon shouldn’t expect drastically lower rates, we do anticipate that the downward trend we’ve been seeing will continue. This sets the stage for potential further cuts, and once these occur, we should begin to see a more noticeable impact. However, it’s important to remember that mortgage rates are expected to settle at levels higher than those we’ve seen in the past, with the market predicting the Base Rate could eventually stabilise around 3.25%.
How Does the Base Rate Reduction Affect Your Current Mortgage?
If you’re on a fixed-rate mortgage, your monthly payments will remain unchanged until your current deal expires. However, if you have a tracker or variable rate mortgage linked to the Base Rate, this reduction will likely lower your monthly payments.
For those nearing the end of their fixed-rate mortgage, now is the time to start considering your next deal. A good starting point is to use a mortgage calculator to get an estimate of how much you could borrow. Applying for a Mortgage in Principle can also help you move closer to securing your next mortgage offer.
In July 2023, the Mortgage Charter was introduced to support borrowers struggling with payments and those whose fixed-rate terms are ending soon. The Charter encourages lenders to be flexible, allowing borrowers to lock in new deals up to six months before their current rate ends.
Of course, you can also consider remortgaging with another lender, though this process can take longer due to the need for income checks, legal processes, and possibly a home valuation. To avoid reverting to your lender’s Standard Variable Rate (SVR), which is typically more expensive than fixed-rate repayments, it’s wise to start shopping around a few months before your current deal ends. The current average SVR is 8.21%.
What Could the Base Rate Reduction Mean for Affordability?
Lenders use ‘stress tests’ to determine whether a borrower can afford a mortgage if their repayments were to increase significantly. These tests are based on SVRs, usually with an additional 1% on top. If SVRs decrease in line with this Base Rate cut, we might start to see improved affordability, as the stress-tested amount will be lower than it would have been at a Base Rate of 5.25%.
Will Interest Rates Drop Further?
The Bank of England’s Monetary Policy Committee meets every six weeks to discuss and vote on whether interest rates should go up, down, or stay the same.
Historically, after a period of increases, rates tend to plateau before beginning to decline. While we’re now witnessing the start of this downward trend, it’s unlikely that rates will return to the historic lows we saw in 2021.
Barring any major economic shocks, it seems likely that the Base Rate will continue to edge downwards through the rest of the year and into 2025. The market is currently predicting one more rate cut of 0.25% before the year’s end. However, this outlook could change depending on broader economic developments.
The next decision on interest rates will be announced at 12 pm on 19 September 2024. Stay tuned for further updates, and be sure to consider how these changes might impact your mortgage or future property plans.