What is the mortgage base rate?

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Anyone with a mortgage will know that it requires careful planning. That’s why any changes to the base rate can be a worry, putting a strain on even the best-managed budgets. But there’s a glimmer of hope—the Bank of England base rate for mortgages has been cut twice this year. On this page, we’ll explore what this rate cut means for you, how it could affect your mortgage, and what to keep an eye on in the months ahead.

The base rate, sometimes called the bank rate, is the interest rate that the Bank of England charges when it lends money to other banks and financial institutions. This rate is important because it has a direct impact on the interest rates charged on mortgages, credit cards, and loans, as well as the interest paid on savings.

Any time the base rate changes, it can have an effect on how much interest you pay on your mortgage. If the base rate is high, borrowing money becomes more expensive, and if it’s low, borrowing costs are cheaper. For variable-rate mortgages, changes to the base rate can affect your payments almost right away. With fixed-rate mortgages, any changes will usually take effect only after your current fixed term ends.

The Bank of England’s Monetary Policy Committee meets every six weeks or so to decide whether to adjust the base rate. By changing the base rate, they are keeping inflation under control, which is the rate at which prices for goods and services rise. The current target set by the government is to keep inflation at around 2%.

When the Bank increases the base rate, borrowing money becomes more expensive. This usually leads to less spending by consumers and businesses. With less money circulating, the demand for goods and services falls. And with less demand comes lower prices, so inflation slows down.

On the other hand, if the Bank lowers the base rate, borrowing becomes cheaper. As a result, people and businesses are more likely to take out loans and spend more, thereby boosting economic activity. Lowering rates can be especially helpful if the economy is slowing down or if prices are falling (deflation).

For example, during the pandemic, the economy was struggling due to businesses closing and people losing jobs. To boost the economy, the Bank of England lowered interest rates to encourage more borrowing and spending.

The Bank of England’s base rate is now 4.75%. As for the mortgage base rate, this varies between providers, but is usually a couple of percentage points above the base rate.

When the base rate changes, it typically affects mortgages from the start of the following month. So if you have a variable-rate or tracker mortgage affected by the cuts to the base rate in September and November 2024, you might have already received notice that your monthly payments are coming down.

To see how this rate cut could impact your payments, you can use a mortgage rate increase calculator available online from most lenders.

Not everyone with a mortgage will be affected by base rate changes. When the Bank of England changes the base rate, mortgage payments will usually only be impacted if they are variable.

The majority of mortgage customers in the UK have fixed-rate deals. With a fixed-rate mortgage, interest rates stay the same for a set term, typically two or five years. This means your monthly payments won’t change for now, even if the base rate goes up or down, but they might do with your next deal.

Once your fixed-rate term ends, your mortgage usually switches to a standard variable rate (SVR) set by your lender. The SVR often tracks the Bank of England’s base rate for mortgages, so if the rate has risen by the end of your fixed period, your payments could increase as well.

Some lenders offer a base mortgage rate at the end of the fixed term. This rate will never exceed a certain percentage above the base rate, which can provide a bit more stability.

A standard variable rate mortgage (SVR) has an interest rate that can change at your lender’s discretion. It’s often influenced by changes in the base rate, but your lender can adjust the rate for other reasons too.

A tracker mortgage closely follows the base rate set by the Bank of England. The interest rate on a tracker mortgage is usually the base rate plus or minus a certain percentage. So if the base rate for mortgages goes up, your interest rate and monthly payments will also increase.

A discount mortgage is a type of variable mortgage that gives you a lower interest rate than the lender’s standard variable rate for a set period. The discount is usually a fixed percentage off the SVR.

If the base rate for mortgages goes up, the SVR often increases too, which means your monthly payments might rise as well, and vice versa. Keep in mind that the details can vary between lenders, so it can help to check the specific terms with your provider.

An offset mortgage links your mortgage to a savings account. When calculating how much interest you owe, the balance in your savings account is subtracted from your mortgage balance, which can lower the interest you pay over time. For example, if you have a £200,000 mortgage and £10,000 in your offset savings account, you only pay interest on £190,000.

Interest rates on both your mortgage and savings account can change with the base rate. However, because your savings are used to reduce the mortgage balance that earns interest, you’re less affected by base rate changes. Therefore, it can be a good idea to pair your mortgage with a high-interest savings account.

Raisin UK offers competitive rates that can help you get more out of your savings and manage your mortgage. Explore our high-interest savings accounts.

Looking ahead to 2025, it’s expected that mortgage base rates in the UK may continue to fall.

In May 2024, the International Monetary Fund (IMF) recommended that UK interest rates be lowered to 3.5% by the end of 2025. They advised that the Bank of England should be cautious about cutting rates too quickly before inflation is fully under control. At the same time, the IMF also highlighted that persistent inflation might mean interest rates could stay higher for longer than expected.

Because it can be hard to predict what might happen, the Bank of England mortgage rates could vary depending on future economic changes.

The Bank of England mortgage rates in the UK are now starting to fall as a result of the base rate change. If you’re looking for a five-year fixed rate mortgage, the average rate is now 4.82%. For a two-year deal, the average rate is 5.05%* (as of November 2024).

Deciding whether to fix your mortgage rate will depend on your current financial and personal situation.

Fixed-rate mortgages offer stability, as you make consistent payments. They typically come in two forms:

• Short-term fixes (like two years) often have lower rates and monthly payments, which can be appealing if you expect rates to drop in the near future. They also allow you to switch deals sooner if your financial situation changes.
• Long-term fixes (like five years) provide stability over a longer period, but may come with higher rates and early repayment penalties if you want to switch before the term ends.

Variable-rate mortgages like trackers might be tempting because you would benefit from the potentially falling rates next year. However, they come with the risk of payments increasing if rates go up.

If you’re concerned about potential mortgage rate increases, you might consider making overpayments, or paying off your mortgage early. This can help you avoid higher future payments, but be aware that some lenders may charge fees for this. These fees compensate for the interest they lose from your early repayment.

Typically, when the Bank of England cuts the mortgage base rate in the UK, it sparks more competition among lenders, which can ultimately lead to better deals for borrowers. However, keep in mind that significant rate cuts may be unlikely in the near future, as the Bank’s Monetary Policy Committee has spoken about the dangers of “cutting rates too much or too quickly”.

If you want a savings account that will help you save for a mortgage, you can quickly and easily open savings accounts with attractive rates from a range of UK banks and building societies through the Raisin UK marketplace. Register and apply today - it’s completely free!

*https://www.rightmove.co.uk/news/articles/property-news/current-uk-mortgage-rates/