What the Bank of England's interest rate cut to 4% means for you
In the first round, member Alan Taylor voted for a bigger cut to 3.75 per cent, but then changed his vote to favour a 4.25 per cent. Whilethe cut might spell good news for mortgage borrowers, it won't be received well by savers, as it might bring bank and building society savings rates down. Today's cut is the fifth since August 2024, with interest rates having fallen 1.25 percentage points from their 5.25 per cent peak. The last decision, on 19 June, was a hold. The next decision is on 18 September. We explain what the Bank of England's decision to cut rates to 4 per cent means for your mortgage and savings - and whether rates will be cut again soon.
What does this mean for mortgage borrowers?
Today's decision to cut the base rate to 4 per cent will be music to mortgage borrowers' ears, as a trend of falling interest rates tends to bring down mortgage rates over time. Those on tracker mortgages, which move with the base rate will see an immediate cut in line with the 0.25 per cent reduction. But while we are likely to see some small fixed rate reductions in the coming days, the decision won't lead to big mortgage rate falls straight away for borrowers looking for new fixed rates. This is because lenders usually base their mortgage pricing on the longer-term trajectory of interest rates, rather than reacting to individual base rate decisions.
For many homeowners, a rate cur delivers no immediate benefit. Most borrowers are locked in to fixed rate deals of two, three or five years, during which time their payments will not change. But there is a cohort for whom rate cuts are very welcome, as they must renew their mortgage deals this year. Between July and the end of December this year, an estimated 900,000 households will reach the end of their existing mortgage fixed rate term, according to UK Finance data. Many of those coming to the end of five-year fixes will have enjoyed mortgage rates between 1 and 2 per cent, taken at a time when interest rates were at rock bottom in the post-pandemic housing boom. Now, they face the prospect of remortgaging to a rate of around 4 per cent or more, or reverting to standard variable rates that can be higher than 7 per cent.
Ravesh Patel, director and senior mortgage consultant at broker Reside Mortgages says: 'Lenders have largely priced in this decision in recent weeks, especially across two and five-year fixed mortgages. 'That said, the confirmation of a cut could improve market sentiment and lead to some modest reductions in fixed rates around 0.2 percentage points over the coming weeks as lenders compete for new business. 'Tracker mortgages will benefit straight away, with monthly repayments falling in line with the base rate cut.
What next for mortgage rates?
Mortgage rates have been trundling down of late. For those with the biggest deposits or equity, the lowest two-year fix is now 3.73 per cent while the lowest five-year fixed deal is 3.86 per cent. Someone buying with a 15 per cent deposit can now get a mortgage rate of 3.99 per cent and a £999 fee if they fix for two years with Nationwide Building Society. On a £200,000 mortgage being repaid over 25 years, that would equate to paying £1,054 a month. Borrowers wishing to know the future direction of mortgage rates may want to look at interest rate forecasts.
Yesterday, Barclays said it thinks that the Bank of England's Monetary Policy Committee split will carry on with a 25 basis point rate cut once every three months until it settles at 3.5 per cent in February. There are some forecasts that suggest interest rates will fall further. HSBC and UBS for instance are forecasting that interest rates will fall to 3 per cent by the end of 2026. There are also some that think interest rates will stay higher. Analysts at Pantheon have forecast that interest rates will finish 2026 at 4 per cent. Fixed-rate mortgage pricing is largely based on Sonia swap rates - the inter-bank lending rate, based on future interest rate expectations.
When Sonia swaps rise sufficiently it often results in fixed mortgage rates going up, and vice versa when they fall. Since the start of June five-year and two-year swaps have drifted downwards. Two-year swaps are now at 3.57 per cent and five-year swaps are at 3.61 per cent. 'While we could see best-buy rates dropping closer to 3.5 per cent in the months ahead, nothing is guaranteed,' says Mendes. 'A lot depends on inflation , labour market data, and wider global pressures. We've been here before and then seen things shift quickly. 'If inflation behaves, the base rate could fall to 3.5 per cent by early 2026, but the Bank has made it clear it won't rush.'
What does this mean for savers?
Now that the base rate has been cut to 4 per cent, it is all but certain savers will see the best savings rates plummet. The base rate affects how much interest savers can earn on their money. In general, savings rates rise when the base rate is rising, and fall when it is falling. Those who keep their cash in easy-access accounts are most at risk of rate cuts. CMC Invest has already cut its three month bonus of 0.85 per cent on its easy-access cash Isa, bringing the underlying rate down to 4.59 per cent from a best-buy 5.44 per cent. The best easy-access accounts currently pay around 4.6 per cent while some accounts with restrictions pay up to 5 per cent.
Andrew Hagger of website MoneyComms says: 'Easy-access deals will take a hit - maybe not falling by a full 0.25 per cent in all cases. 'The best buys may be trimmed by only 0.1 per cent to 0.15 per cent in some cases to say near the top of the tables.' When it comes to fixed rate bonds the August cut has probably already been priced in - 'but banks will be looking for clues in the Bank of England commentary as to if and when rates will fall further this year,' says Hagger.
What next for savings rates?
If the base rate falls to 3.75 per by the end of this year, as markets are currently predicting, it is forecast that easy-access rates will fall below 4 per cent for the first time since the summer of 2023 and fixed-rate bonds will fall to just above 4 per cent. The best one-year fixed-rate bond currently pays 4.5 per cent. This is down from a high of 6.2 per cent in October 2023. Andrew Hagger says: 'I think there's slight a chance we may see one further 0.25 per cent cut in November or December - leaving the base rate at 3.75 per cent.' 'If this is the case, then come the end of 2025 I think the top easy access accounts, without restrictions, will be paying in the region of 3.8 per cent to 3.9 per cent with the best fixed rates around 4 per cent to 4.1 per cent for one year.'
What should savers do now?
People should keep a close eye on their savings, whether they are stashed in an easy-access account, fixed-rate account or an Isa . If your money is not working hard enough for you or earning interest at a rate of less than the rate of consumer price inflation, 3.6 per cent, you should consider moving it to an account paying a better rate. Rachel Springall says: 'It is essential that savers do not wait around for too long to snap up the top rates on the market, particularly if they use their pots to supplement their monthly income.
'Cash Isas remain an attractive choice for savers, but in bad news the rates have taken a hit over the past year, with the average easy access Isa rate falling by 0.46 per cent, a similar drop to its non-Isa counterpart.' While Andrew Hagger says: 'If you've got some spare cash that you don't need for a year or two, then locking some away in a fixed rate bond makes sense as fixed rates are unlikely to increase from their current levels for a good while yet.'
Best savings rates and how to find them
The best easy-access savings accounts with no restrictions pay around 4.6 per cent. Atom Bank is offering a market-leading easy-access deal paying 4.6 per cent. Someone putting £10,000 in this account could expect to earn £460 in interest after a year, if the rate remains the same. Those with cash they won't immediately need over the next year or two should consider fixed-rate savings. The best one-year deal is offered by Vanquis Bank paying 4.5 per cent. A saver putting £10,000 in this account will earn a guaranteed £450 interest over one year. It comes with full protection under the Financial Services Compensation Scheme up to £85,000 per person.
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