Interest rates held at 5%: here’s what it could mean for mortgages

The Bank of England (BoE) has announced it will hold the Base Rate at 5% this month. This comes after it was reduced for the first time in four years in August, by 0.25%. 

The Bank had been raising, and holding, interest rates to tackle high levels of inflation, which was in excess of 10% in early 2023 – way above the government target of 2%. Inflation fell back to its 2% target in the month to May 2024, and, aside from some small upticks, has hovered around this number since. It was announced yesterday that inflation remained at 2.2% in the month to August. 

The Bank’s focus is to strike the right balance between keeping inflation close to its target, and keeping the wider economy healthy. And though we’ve received news of a hold today, the markets widely expect more Base Rate cuts to come, with the potential for two further reductions before the end of the year.  

What’s happened to mortgage rates recently?

We’ve seen mortgage rate drops gather pace in the last couple of weeks. This is because of a combination of factors, including lenders competing for new business, and August’s much-anticipated interest rate reduction. 

The average 5-year fixed rate is down from 6.08% in July 2023, to 4.62% this week, and the average 2-year fixed rate is down from 6.61% in July, to 4.98%. You can check the current average mortgage rates for different terms and deposit sizes here, which we update weekly. 

What do the experts think?

Our mortgage expert, Matt Smith, says: “We’re still expecting two rate cuts before the end of the year, and home-movers should continue to see a downward trend in mortgage rates this side of Christmas. I think overall, there’s likely to be quite a moderate response from lenders in response to today’s news – and whilst rates should continue to come down, mortgage lenders’ funding costs are unlikely to come down significantly, which wouldn’t leave heaps of room for dramatic mortgage rate cuts.  

“However, we’ll monitor how things play out over the coming days, and I think we could see a mixture of some lenders holding rates while others cut further to drive up pre-Christmas business. Overall, I think there’s an optimistic mood about where we’re heading, and lowering mortgage rates is supporting the increased home-moving activity we’re seeing right now particularly against last year.”

What does the Base Rate hold 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 variable or tracker mortgage, this month’s Base Rate hold will mean your monthly payments remain the same.

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.

A good way to find out how much you could borrow is to use a mortgage calculator. And to 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 – which will cost more than the repayments you’d have made on a fixed rate mortgage. The current average for SVRs is 8.01%. 

When could interest rates fall again?  

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 gradually.  

The Bank of England will be conscious not to make additional cuts too early, undoing the measures that brought sticky inflation back to its 2% target. Right now, it’s looking more likely that, barring any shocks to the wider economy, we could see the Base Rate cut again before the end of the year, and expect it to continue to edge downwards through 2025.  

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 12pm on 7 November 2024. 

The header image for this article was provided courtesy of Ivy Property, Glasgow

READ MORE: What is the Mortgage Charter and what help does it offer borrowers?

Please note: Rightmove is not authorised to give financial advice; the information and opinions provided in these articles are not intended to be financial advice and should not be relied upon when making financial decisions. Please seek advice from a specialist mortgage provider.