Base Rate cut to 3.75%: what could it mean for mortgages?

Key summary:

• The Bank of England has voted to reduce the Base Rate by 0.25% for the fourth time this year, taking it to 3.75%
• It was announced yesterday that inflation had fallen to 3.2%, down from 3.6% the previous month. This sharper-than-expected drop in inflation made a cut today even more likely
• 2-year-fixed rates are now cheaper on average than 5-year fixes (5-year fixes had been cheaper on average for the last few years). So, we could see more borrowers look to move to shorter-term fixed rate deals

The Bank of England 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. Today, Base Rate was cut from 4% to 3.75%.

Inflation fell to 3.2% yesterday, which, while the lowest level it’s been in eight months, is still above the 2% target the government sets for the Bank. This bigger than expected drop was driven mostly by falls in food prices.

The financial markets have been widely expecting a cut to interest rates this week, due to sluggish economic growth and unemployment levels creeping up. And after a close vote in September – with five MPC members voting for a hold, and four voting for a cut – a 0.25% reduction had looked all but certain before today.

What’s happened to mortgage rates recently?

Mortgage rates have continued to fall steadily in recent weeks. The average rate for a 2-year fixed rate mortgage is currently 4.24%, which is 0.82% less than at this time last year. The average rate 5-year fixed rate is also 4.35%, which is 0.47% less than a year ago.

Right now, the average 2-year fixed rate is around 0.1% less than the average 5-year fix. 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, 2-year fixes have become the cheaper option for borrowers on average.

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: “The financial markets and mortgage lenders have been expecting today’s Bank Rate cut for a while, and therefore responded early with mortgage rate cuts in December to round off the year. Bank Rate cut headlines are always positive for home-mover sentiment, even if this one has already been baked into mortgage rate cuts and won’t drive further drops.”

“However, what will have more of an impact on the future direction of mortgage rates is the better-than-expected inflation figure reported earlier this week, which has improved the market’s forecast for next year. Don’t expect any big rate drops before Christmas while the property market is quieter, but it does mean we could now see a fresh round of rate cuts in the new year as lenders look to start the new year with a bang. Home-movers are likely to see the most notable rate drops for two-year fixed products rather than five, and next year we expect the gap between two-year and five-year deals to grow.”

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 7.11%.

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 are forecasting another Base Rate cut in 2026, with potentially two cuts on the cards across the Bank’s eight meetings. 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 6 February 2026.

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