Following the first Monetary Policy Committee (MPC) meeting of the year, a base rate cut has been agreed. This has lowered the Bank of England’s (BoE) base rate from 4.75% to 4.5%. This cut had been widely anticipated following a surprise drop in inflation to 2.5% in the year to December.
The decision to cut the rate to 4.5% means that it has reached its lowest level in over 18 months. It’s welcome news for mortgage holders who have been waiting for interest rates to come down.
Why a base rate cut was needed
The base rate helps determine borrowing costs, such as for mortgages and other loans. It has been kept at higher levels, rising to 5.25% in late 2023, to try to curb spending. This, in turn, has worked to slow the rate at which prices increase.
The drop to 2.5% for inflation in the year to December, however, was unexpected. It had been forecast to remain at 2.6% or even increase to 2.7%, showing that inflation is slowing at a faster rate than anticipated. Although inflation is still above the target of 2%, the BoE has been under pressure to reduce the cost of borrowing to boost the stagnating economy.
This base rate cut has been welcome news. However, whilst inflation is returning to the BoE’s target of 2%, there are still concerns that it will rise again, especially with changes that were announced in the Autumn Budget. As such, the BoE’s governor, Andrew Bailey, has already stated that a gradual approach will be taken to interest rate cuts in the future.
How will this base rate cut affect your mortgage?
The base rate impacts how much the BoE charges lenders to borrow money. Any changes made to it influence what lenders can offer as mortgage rates. They have to price in the impact that the base rate will have when setting their interest rates for mortgage products. With mortgage rates having been so high for so long, mortgage holders have been waiting for a base rate cut. So how will the lower rate affect your mortgage?
If you have a tracker mortgage, you’ll be the first to benefit. As a tracker mortgage typically tracks the base rate, this means that the interest rate you pay will decrease. If you have a standard variable rate mortgage, the lender sets the interest rate payable. Hopefully, they will pass on this base rate cut so that you can benefit from it too.
If you have a fixed rate mortgage, your rate will remain unaffected until the end of the fixed term. At that point, the new fixed-rate products offered will hopefully have lower rates than those previously offered, especially if further cuts to the base rate are made. This will enable you to benefit from a better deal when you’re ready to make the change.
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Whether you’re looking for a new mortgage or considering a remortgage, our mortgage brokers are here to help you. They can discuss your current situation, compare the deals available and provide you with impartial advice. That way, you can weigh up the options available to make the best decision for your needs. Just give us a call on 01322 907 000 to speak with one of our mortgage experts today.