What the Interest Rate Drop means for your Mortgage

The Bank of England has reduced its base interest rate from 4.75% to 4.5%.

The 0.25 percentage point cut was widely expected by analysts and is the third reduction since August 2024. The next rate decision is on March 20.

The cut is positive news for some mortgage borrowers but unwelcome for savers, as it will likely lead to lower interest rates on savings accounts.

The Monetary Policy Committee voted 7–2 for the cut. Two members pushed for a deeper reduction to 4.25%.

This will affect mortgages and savings.

What does it mean for mortgage borrowers?

Tracker mortgage holders will benefit immediately, as these rates move in line with the base rate.

Standard variable rates may also decrease, but that will depend on individual lenders.

Ravesh Patel, director and senior mortgage consultant at Reside Mortgages, said:

“If you’re on a fixed-rate deal, your payments won’t change until your current term ends.

“However, those looking to secure a new deal may start to see gradual reductions in fixed mortgage rates, depending on market conditions, but rates are unlikely to return to the historic lows seen in the past decade.

“Borrowers on tracker mortgages will see an immediate reduction in their monthly repayments, as their rate moves in line with the base rate.

“Standard variable rates (SVRs) may also decrease, but this depends on individual lenders.”

Five-year fixed-rate deals are currently available at around 4.5%.

The lowest five-year fix for a buyer with a 40% deposit is 4.13%. Someone borrowing £200,000 over 25 years at that rate would pay £1,070 a month.

Two-year fixed rates are slightly higher, with the lowest at 4.23% for larger deposits. Those with a 10% deposit can secure rates starting from 5.03%.

Patel added: “Fixed-rate mortgage pricing is driven by swap rates, which have already factored in some expectation of rate cuts.

“Up until recently, swap rates were trending upwards, with markets reassessing how quickly and how far rates would fall.”

“Most forecasts suggest the Bank of England will cut rates gradually over the coming months, with one or two further reductions possible this year if inflation continues to ease.

“However, uncertainty remains, and any unexpected economic shocks could slow this trajectory.

“While the rate cut signals a turning point, mortgage rates won’t necessarily fall overnight. Borrowers should stay informed and review their options to make the most of the shifting market.”

What does it mean for savers?

Savers are likely to see cuts to interest rates on savings accounts, especially as banks tend to react quickly to base rate reductions.

Rachel Springall from Moneyfacts said:

“Savers who rely on their cash savings to boost their income are at the mercy of lower interest rates.

“It has already been proven that cuts to the Bank of England base rate set the wheels in motion for the biggest banks in the country to cut rates, showing loyalty does not pay.”

The average easy-access savings rate has fallen from 3.17% in February 2024 to 2.92% today. Challenger banks offering higher rates may also be forced to cut them soon.

Savers can still get 4.85% on easy-access accounts from providers like Chip, which includes a six-month bonus.

For fixed-rate savings, Vida Savings offers a market-leading one-year deal at 4.77%.

Financial expert James Blower of Savings Guru advises savers to consider cash Isas.

He said: “Maximise your Isa allowance if you haven’t already – the best easy-access Isa rates beat the best taxable accounts currently, so take advantage.”