The Bank of England, meeting for the first time this calendar year, have announced a 25 base point reduction, bringing interest rates down from 4.75% to 4.50% This marks the third interest rate cut since the Covid-19 pandemic, following reductions in August and November of 2024, and brings rates to their lowest in the last 18 months.
What factors are driving this reduction?
The primary factor driving the decision is the gradual fall in inflation, with latest figures in December showing that inflation currently sits at 2.5%. While this is still slightly higher than the Bank of England’s target of 2%, it is substantially lower than the peak rate of 11.1%, which was reached in October 2022.
Additionally, economic stagnation adds to the pressure for the Bank to lower rates. GDP in the UK grew by just 0.1% in November 2024. This followed 0.1% contraction in both September and October of the same year. Lower interest rates reduce borrowing costs, which in turn stimulates spending and economic growth.
What does this reduction mean for mortgages?
While a reduction in rates is an overall positive step, it is important to note that many mortgage types are not directly linked to interest rates and thus will not be immediately impacted by the Bank of England’s decision.
Tracker and Variable Rate Mortgages
Those with mortgages that are linked directly to interest rates, such as tracker mortgages, will see their monthly payments reducing in line with the 0.25% reduction. Those with Standard Variable Rate (SVR) mortgages are also likely to see their payments reduced. However, SVR mortgages are subject to lender margins and discretion, so the amount reduced is likely to vary from lender to lender.
Fixed rate mortgages
However, fixed rate mortgages are not determined expressly by interest rates, but rather by swap rates. Swap rates are the rates at which banks borrow money from the financial markets in order to provide borrowing to their customers.
Reductions in swap rates are proactive and not reactive. Given the fact that industry experts anticipated a 25 base point drop, lenders have been slowly reducing their rates over the weeks leading up to the Bank’s decision, and thus it is unlikely that we will see any immediate changes to fixed rate mortgages.
What do we think?
Speaking on the Bank of England’s decision, Thomas Jackson, Managing Director of Cooper Associates Mortgages, said:
“The announcement today was very much in line with our and wider predictions. Clients with tracker mortgages will see the quickest benefit of this change. There are circa 1.8million mortgages coming to an end this year so this is promising news for these clients who are needing to look for new deals in the near future. Markets (SONIA Swap Rates) which the vast majority of lenders utilise to price their mortgage rates have seen, mostly, reductions over the last month so this should gradually start to be seen by clients, which will be great news for many.”
While the reduction of interest rates is positive news, economic uncertainty is still rife. At Cooper Associates Mortgages, it’s always the best time to reach out to discuss your mortgage. We can help you lock in a mortgage rate now, but should a better rate become available to you afterwards, we will swap you to the better product.
Cooper Associates Mortgages team of expert mortgage advisers are on hand to assist, whatever your mortgage needs. Get in touch today to find out how we can help.
