Base Rate cut to 4%: what could it mean for mortgages?

The Bank of England has voted to reduce the Base Rate by 0.25% for the third time this year, taking it to 4%. Base Rate was held at 4.25% in June after it was cut by 0.25% in May. 

The Bank meets every six weeks to decide what should happen to interest rates, with the aim of keeping inflation to its target and keeping the wider economy healthy. Inflation is at 3.6%, which is above the 2% target the government sets for the Bank. 

The financial markets have been widely expecting a cut to interest rates this week, as continuing to hold rates could have a negative knock-on effect on economic growth, impacting businesses and households further down the line. 

What’s happened to mortgage rates recently? 

Mortgage rates have continued to come down slowly in recent weeks. The average rate for a 2-year fixed rate mortgage is currently 4.51%, which is 0.73% less than at this time last year. The average rate 5-year fixed rate is also 4.51%, which is 0.35% less than a year ago.  

Right now, the average rates for 2 and 5-year fixed rates are almost identical. This is a big change from August 2023, when the average 2-year fixed rate was almost 0.5% higher than the average 5-year rate. 2-year mortgage rates were higher than 5-year rates because the markets expected interest rates to fall in the longer team, making longer-term fixes less risky for lenders. Now that future rate cuts are less certain, and the short-term risk for lenders has eased, the gap between the two has narrowed. 

You can check the current average mortgage rates for a range of different deposit sizes here, and the current remortgage rates here. 

What do the experts think? 

Our mortgage expert, Matt Smith, says: “As expected we now have the third Bank Rate cut of the year, with the Bank continuing along its forecast trajectory. Mortgage lenders have had a bit of room to reduce rates over the last week, owing to the ongoing developments around global tariffs. However, we expect that lenders will use the headline of today’s cut as the catalyst to reduce their rates a little further, though lender competition remains fierce and we don’t expect major rate drops. 

“Lenders have been competing for business in a market which has the largest supply of homes for sale in a decade. A combination of rate cuts and changes to buyer affordability criteria are helping many home-movers to responsibly borrow more towards the home that they want. 

“The market expects there will be one more Bank Rate cut before the end of the year, with an outside chance of two. Any further cuts would likely see this cycle repeat again – with lenders using it as an opportunity to reduce rates a little more. It bodes well for the second half of this year, with further mortgage rate reductions and stable prices likely to encourage more activity.” 

What does the Base Rate reduction mean for my current mortgage? 

Changes to the Bank’s Base Rate can impact how much interest you’ll pay on loans, including mortgages. If you’re on a fixed-rate deal, your monthly payments won’t change until the end of your deal. And if you’re on a tracker mortgage, or a variable rate mortgage that follows Base Rate changes, this month’s Base Rate reduction will mean your monthly payments will take on this drop. 

If you’re coming to the end of your fixed-rate mortgage soon, you’ve probably already started to think about the rate you’ll be offered on your next deal. 

If you’re thinking of moving home soon, a good way to find out how much you could borrow is to use a Mortgage Calculator or Remortgage Calculator. You can get a personalised result by applying for a Mortgage in Principle, which will take you one step closer to a mortgage offer. 

In July 2023, the Mortgage Charter was launched to help those struggling to meet their monthly payments, as well as borrowers who are coming to an end of their fixed rates soon. 

The Mortgage Charter encourages lenders to be flexible and offer borrowers the chance to lock in a new deal up to six months before their current rate ends. Of course, borrowers can also look at moving to another lender – commonly known as remortgaging – but this can take longer, as you have to go through a normal lending process, such as income checks, the legal process, and maybe a valuation of your home. 

This all takes time, and you would want to make sure you’re looking around a few months before the end of your current deal to avoid falling onto your lender’s Standard Variable Rate (SVR) – which will cost more than the repayments you’d have made on a fixed rate mortgage. The current average for SVRs is 7.31%. 

You can check the current remortgage rates here, or use our Remortgage Calculator. 

What could the Base Rate reduction mean for affordability? 

Lenders’ ‘stress test’ calculations – which is how they calculate whether someone could afford a mortgage were their repayments to jump considerably – are directly linked to the Standard Variable Rates that we just talked about above. 

The ‘stressed rate’ is usually the lender’s SVR, with at least 1% added on top. So, if lenders’ SVRs reduce in line with this Base Rate cut, we might start to see affordability improve, because the stressed amount will now be lower than if Base Rate wasn’t reduced today. 

You can read more about how lenders calculate affordability for mortgages here. 

What could happen next? 

The Bank of England’s Monetary Policy Committee meets every six weeks to discuss and vote on whether interest rates should go up or down, or stay the same. 

History has shown that after interest rates have increased over time, they have remained flat before starting to come down. So, while we’re now seeing a gradual downward curve, it’s extremely unlikely that rates will drop back to the historic lows we saw back in 2021. 

The financial markets have been forecasting one more possible cut to Base Rate in 2025. So, we could see it fall to 3.75% by the end of the year. Though as always, this could change depending on what happens in the broader economic environment. 

The next decision on interest rates will be announced at midday on Thursday 18 September 2025.

The header image for this article was provided courtesy of Hudson Moody, York City Centre

READ MORE: Take a look at the current UK mortgage rates