The Bank of England (BoE) has announced a reduction in the Base Rate to 5%, a decrease of 0.25%, marking the first cut in four years. This rate had been held at 5.25% since August 2023, following a series of 14 consecutive increases.

Previously, the Bank had raised and maintained rates to combat high inflation, which exceeded 10% in early 2023, significantly above the government’s target of 2%. As of June, inflation had fallen to the target level, and it remained stable at 2% in July.

There was considerable speculation about today’s decision, with market analysts evenly split on whether the Bank would maintain the rate or implement a 0.25% cut.

The divided expectations regarding today’s rate decision were partly due to ‘service inflation’ remaining stubbornly high as of June. This type of inflation pertains to services such as hospitality and culture, rather than physical goods like those found in a shopping basket.

The Bank’s objective is to balance reducing inflation while supporting the broader economy. The decision to lower the rate indicates the Bank’s confidence that its strategies to manage inflation are effective. They also consider that continuing to hold rates could potentially harm businesses and households in the long term.

Recent Trends in Mortgage Rates

Earlier this year, an unexpected rise in inflation led to an increase in mortgage rates through the spring. However, as inflation returned to the 2% target over recent months, mortgage rates have stabilised.

Following the establishment of a new government and increased competition among mortgage lenders, there has been a noticeable drop in mortgage rates recently. Notably, the first sub-4% rate for borrowers with larger deposits has emerged after many months, and more lenders are expected to follow suit.

Currently, the average rate for a five-year fixed mortgage has decreased from 6.08% in July 2023 to 4.87%, while the average rate for a two-year fixed mortgage has fallen from 6.61% to 5.25%.

Expert Opinions

Our mortgage expert, Narinder Dhoot from Check My Mortgage, notes: “The long-anticipated Base Rate reduction has finally occurred. While those planning to secure a mortgage soon may not see significantly lower rates immediately, the recent downward trend is expected to continue. This sets the stage for potential further cuts. However, it’s essential to remember that mortgage rates are likely to stabilise at levels higher than we have seen previously, with the market predicting that the Base Rate might eventually settle around 3.25%.”

Impact on Existing Mortgages

Changes in the Bank’s Base Rate can affect the interest you pay on loans, including mortgages. If you’re on a fixed-rate mortgage, your payments won’t change until the end of your term. However, if you have a tracker mortgage or a variable-rate mortgage linked to the Base Rate, this month’s reduction will lower your monthly payments.

For those nearing the end of a fixed-rate term, it’s time to consider the rates available for your next deal.

If you’re planning to move house soon, using a mortgage calculator can help you determine how much you could borrow. Applying for a Mortgage in Principle provides a more personalised estimate, bringing you closer to securing a mortgage offer.

In July 2023, the Mortgage Charter was introduced to assist those struggling with payments or approaching the end of their fixed-rate deals. The charter encourages lenders to offer flexible options, allowing borrowers to lock in a new deal up to six months before their current rate expires. Remortgaging to a different lender is also an option, though this process takes time due to necessary steps like income verification, legal proceedings, and possibly a home valuation.

It’s advisable to start exploring your options a few months before your current deal ends to avoid switching to your lender’s Standard Variable Rate (SVR), which is generally higher, currently averaging 8.21%.

What Does the Base Rate Cut Mean for Affordability?

Lenders use ‘stress tests’ to assess whether borrowers can afford a mortgage if repayments rise significantly. These tests are based on SVRs, with an additional 1% typically added. If SVRs decrease following the Base Rate cut, we might see improved affordability as the ‘stressed rate’ would be lower.

Future Interest Rate Trends

The Bank of England’s Monetary Policy Committee meets every six weeks to decide on interest rates. Historically, after a period of rising rates, there’s often a plateau before rates begin to decline. While we’re currently at the start of a potential downward trend, it’s unlikely that rates will drop to the historically low levels seen in 2021.

Current forecasts suggest that barring major economic changes, the Base Rate might continue to decrease modestly through the rest of 2024 and into 2025, with a possible additional 0.25% cut expected by the end of the year. However, these predictions are always subject to change based on broader economic developments.

The next announcement on interest rates is scheduled for 12 pm on 19 September 2024

Author: Jag Chaggar