The Bank of England’s first cut to the base rate since 2020 will come as a huge relief to those with mortgages who have been grappling with higher repayments since the cycle of rate hikes began.
But how much of a difference will it really make to household budgets?
Lenders have already been pricing a potential rate cut into their fixed-rate mortgages and, as such, prices have been falling over the last few weeks.
Meanwhile, as the news of the interest rate cut was announced, some lenders confirmed their variable rates – which are set according to the Bank of England (BoE) – base rate would be cut accordingly.
Anyone who has already locked into a fixed-rate mortgage will see no difference to their repayments.
As such, the general sentiment from experts is the news is positive but it won’t make a radical difference to people’s mortgages.
Paul Broadhead, head of mortgage and housing Policy at the BSA, said: “Today’s cut in Bank Rate marks a turning point in what has been a very difficult two and half years.
“The news will be welcomed by many homeowners and aspiring first-time homebuyers.
“Whilst a 0.25% cut in the rate, to 5.00%, will not have a significant impact on the overall cost of mortgage payments, it is likely to boost to consumer confidence and lead to an increase in housing market activity.”
Meanwhile, Stephanie Daley, director of partnerships at Alexander Hall, said it would help ease affordability constraints for many people.
“The Bank of England’s decision to cut offers a significant opportunity for homeowners and home buyers,” she said.
“While mortgage rates may not drop immediately, this change should help release pent-up demand in the market, restoring confidence among buyers and those looking to move house who had delayed plans due to higher rates.
“Over the past three years, many clients opted for longer mortgage terms, especially home movers and those remortgaging.
“The drop in base rate should ease affordability concerns, making longer-term lending, now available up to 40 years, more feasible and appealing.”
Alice Haine, personal finance analyst at Bestinvest by Evelyn Partners, thought first-time buyers would still face challenges. “While a 25-basis point rate cut coupled with lower inflation will improve the affordability hurdles many first-time buyers are contending with,” she said, “house prices remain alarmingly high relative to incomes.
“An average earner purchasing a typical first-time buyer property is looking at a monthly mortgage payment that eats up almost 40% of their take-home pay – a huge jump on the pre-pandemic figure of 28%.
“For existing borrowers, the rate cut is great news for those on tracker mortgages but it is less of a boon for existing borrowers who may be locked into expensive fixed-rate deals with some time left to run, or those rolling off ultra-cheap, fixed-rate deals taken out before the BoE began hiking rates who will still have to face a hike in repayments.”
Will there be more rate cuts going forward?
Interest rates began increasing from their low of 0.1% in December 2021 and there followed 13 more consecutive rises which culminated in August 2023 with the rate reaching 5.25% as the BoE attempted to control inflation.
The BoE’s monetary policy committee (MPC) has voted at every meeting since then to maintain the base rate at 5.25%. But, with inflation reaching its target level of 2% in the Spring, markets were expecting a cut to interest rates during the summer.
In today’s MPC meeting five of the nine-member committee voted to cut rates with four preferring to hold them at 5.25%. It was a close decision.
So, what are the chances of another rate reduction?
Haine said: “Inflation has the potential to nudge upwards later in the year when declines in energy prices in 2023 fall out of the annual comparison while Chancellor Rachel Reeves’ public sector pay rises could also have an inflationary effect, so the BoE may be cautious on the timing of its next rate move.”
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