What the Bank of England’s interest rate cut means for your mortgage
The Bank of England has reduced rates by 0.25 percentage points to 4.25 per cent in a hotly anticipated cut that will leave homeowners with big decisions for their mortgage deals.
The reduced cost for banks to borrow money will have broad implications for the mortgage market, as banks lower interest rates on loans.
Major British lenders began to lock horns in a price war ahead of the cut as brokers forecasted more cuts on the horizon.
The Financial Conduct Authority has also began to add pressure to lenders, urging them to utilise new flexibilities to lower mortgage costs.
Alice Haine, personal finance analyst at Bestinvest, said: “The latest interest rate decision will certainly deliver some spring cheer to those households still trying to get budgets back on track following post-pandemic cost-of-living and borrowing crises that saw personal finances squeezed to the max.”
A win for first-time buyers
First-time buyers were set to be some of “most relieved” by a potential easing of borrowing cost, Haine said, along with borrowers with heavy debts.
The cut will likely trigger a decrease in the starting rate for fixed mortgages.
Following a period where interest rates hit a post-financial crisis high of 5.25 per cent, first-time buyers might be encouraged to lock in a good deal before the tide turns.
Haine said: “First-time buyers looking to escape high rents will be particularly buoyed by the latest interest rate news as it bolsters their chances of actually getting a foot on that elusive property ladder.”
But new buyers will be faced with changes to stamp duty after Chancellor Rachel Reeves dropped the threshold to £500k from £625k.
Natwest’s net loans increased £3.4bn in the quarter, boosted by a surge in retail banking mortgages as buyers rushed to beat Reeves’ 31 March deadline.
Time to remortgage?
While fixed term changes provide a boost for first-time buyers, it hands those already mortgaged a difficult question.
They will be faced with whether to “secure another fixed-rate deal or take a punt on further interest rate cuts,” Haine said.
Sarah Coles, head of personal finance at Hargreaves Lansdown, said the cut was “more good news for remortgagers”.
Those remortgaging may be able to secure a lower interest rate deal, and thus lower monthly payments, on the back of the Bank of England’s decision.
Those on a standard variable rate may also opt to switch to a fix-term to capitalise on low interest rates.
Haine said shopping around for the best deal was “key to avoid reverting to a lender’s ultra-expensive standard variable rate”.
A boost for tracker mortgages
Monthly payments for those on tracker mortgages – deals directly linked to the central rate – will be expected to fall almost immediately after the cut.
The amount of people issued trackers has grown in recent years, hitting 198,044 in 2024. This was up from 118,818 in 2021.
Haine said: “Borrowers on tracker mortgages pegged to the base rate will see a more-or-less immediate reduction in their monthly repayment while those locked into expensive fixed-rate deals with multiple months or years left to run must remain patient as their costs will stay the same.”
But, homeowners may neglect to rush into changing their mortgages with markets pencilling in four interest rate cuts for the year.
Coles said: “The Bank has warned that cuts aren’t guaranteed, and a sizeable surprise from the other side of the pond still has the potential to set rates on a different course.”
Barclays became the first FTSE 100 bank to drop rates earlier this year after reducing two- and five-year fixed deals to 3.99 per cent.
This followed TSB, Coventry Building Society, Bank of Ireland and Co-op Bank all trimming rates.
Emma Jones, managing director at Whenthebanksaysno said: “It’s starting to feel like we could have a price war through the summer months.”