The recent changes in the Bank of England’s base rate will have significant implications for property finance. The recent announcement on 6 February 2025, which saw the base rate decrease from 4.75% to 4.50%, is no exception. This article provides a comprehensive overview of how this rate cut affects various aspects of property finance, including mortgages, loans, and savings.
Understanding the Base Rate and its Importance
The Bank of England’s base rate is a critical tool used to control inflation and influence economic activity. It represents the interest rate at which the Bank lends money to other financial institutions. Consequently, it affects the interest rates that lenders charge their customers for loans and mortgages, as well as the rates offered on savings accounts.
The primary goal of adjusting the base rate is to maintain inflation at the Bank’s target of 2%. When inflation is high, the Bank may raise rates to encourage saving and reduce spending, thereby cooling down the economy. Conversely, when inflation is low or the economy needs a boost, the Bank may cut rates to encourage borrowing and spending.
The Recent Rate Cut: What it Means
The latest base rate cut to 4.50% is part of a series of adjustments aimed at stabilising the UK economy. After maintaining rates at a 16-year high of 5.25% for several months, the Bank of England began reducing rates in August 2024. The February 2025 cut is the latest step in this process, reflecting ongoing efforts to balance inflation control with economic growth.
Impact on Mortgages
For homeowners and prospective buyers, the base rate cut has direct implications for mortgage rates. Approximately one-third of households in the UK have a mortgage, and the type of mortgage determines how quickly they feel the effects of the rate change.
Tracker Mortgages
These mortgages are directly linked to the Bank of England’s base rate. As a result, the recent cut will lead to an immediate decrease in monthly repayments for those with tracker mortgages. For example, a 0.25 percentage point cut typically saves homeowners around £29 per month.
From 1 March 2025, standard mortgage rates will decrease from 7.49% to 7.24%, and base mortgage rates will drop from 6.75% to 6.50%. These reductions will provide some relief to borrowers on these rates.
Fixed-Rate Mortgages
While the base rate cut does not immediately affect fixed-rate mortgage holders, it can influence future deals. Currently, fixed mortgage rates remain higher than they have been for much of the past decade. As of 19 February, the average two-year fixed mortgage rate was 5.41%, and the five-year rate was 5.23%. The prospect of further rate cuts may encourage lenders to offer more competitive rates to new borrowers.
Impact on Loans and Credit Cards
The base rate cut also affects other forms of borrowing, such as personal loans and credit cards. While lenders may reduce their interest rates in response to the Bank of England’s decision, this process tends to be gradual. Borrowers may see a slight decrease in the cost of borrowing over time, but the immediate impact is often less pronounced than with mortgages.
Impact on Savings
For savers, a base rate cut typically means lower returns on savings accounts. The current average rate for an easy access account is around 3% per year. As banks and building societies adjust their rates in response to the base rate cut, savers may find their returns diminishing. This can be particularly challenging for those who rely on interest income to supplement their finances.
Broader Economic Implications
The Bank of England’s decision to cut the base rate is influenced by various economic factors. The main inflation measure, the Consumer Price Index (CPI), was 3% in the 12 months to January 2025. Although this is significantly lower than the peak of 11.1% in October 2022, it remains above the Bank’s target of 2%.
The Bank has also revised its growth forecast for the UK economy in 2025, reducing it from 1.5% to 0.75%. This adjustment reflects concerns about potential economic challenges, including the impact of increased National Insurance contributions and minimum wage rises set to take effect in April.
Bank of England Governor Andrew Bailey has indicated that further rate cuts may be considered, but emphasised a gradual and careful approach. The Bank must balance the need to control inflation with the risk of damaging economic growth.
International Context
It’s also important to consider how the UK’s interest rates compare with those of other major economies. In recent years, the UK has had one of the highest interest rates among the G7 countries. For example, the European Central Bank (ECB) has reduced its main interest rate for the eurozone to 2.5%, while the US Federal Reserve’s key lending rate is in the range of 4.25% to 4.5%.
These international comparisons highlight the challenges faced by central banks worldwide as they navigate economic uncertainties and strive to achieve their inflation targets.
Comment
The recent Bank of England base rate cut to 4.50% has significant implications for property finance, affecting mortgage rates, loans, and savings. As always, we are here to support our clients in understanding these changes and making informed decisions.
How can we help?
Jay Lafinhan is a Partner in our Real Estate Finance team.
If you have any questions or need further advice on how the base rate cut affects your property finance, please do not hesitate to contact us via our online contact form or call 0330 111 3131.