Mortgage Rates Could Drop Again – Here’s How to Take Advantage NOW!

The Bank of England has reduced interest rates from 4.75% to 4.5%, marking their lowest level in the past 18 months. This latest cut, announced in February 2025, is the third reduction since August 2024. However, the Bank has emphasized a “gradual and careful” approach to further rate reductions.

Interest rates have a direct impact on mortgages, credit cards, and savings accounts, affecting millions of people across the UK. Here’s what you need to know about interest rates, their impact on borrowing and saving, and what to expect in the coming months.

What Are Interest Rates and Why Do They Change?

An interest rate determines the cost of borrowing money and the return on savings. The Bank of England’s base rate sets the benchmark for what banks charge each other to borrow money. This influences the rates banks offer to customers on mortgages, loans, and savings accounts.

The Bank adjusts interest rates primarily to control inflation. Inflation is the measure of how much prices increase over time, and the Bank’s goal is to keep it at 2%. If inflation rises too high, the Bank increases rates to encourage saving and reduce spending. Conversely, if inflation is low, it may lower rates to stimulate borrowing and investment.

Currently, inflation in the UK stands at 3% (as of January 2025)—higher than the target but significantly down from its peak of 11.1% in October 2022. The expectation is that inflation may rise to 4% later in 2025, which could influence future rate decisions.

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Will Interest Rates Go Down Further?

While it is difficult to predict with certainty, experts anticipate more rate cuts in 2025. However, several factors will influence this decision:

• Inflation trends – If inflation remains above the 2% target, the Bank may hold off on further reductions.
• Economic growth – The Bank recently cut its 2025 UK growth forecast from 1.5% to 0.75%. If the economy slows further, additional rate cuts may follow.
• Global factors – Policies such as US President Donald Trump’s proposed tariffs on key imports and the rising National Insurance and minimum wage in the UK could impact the Bank’s decisions.

Despite these uncertainties, mortgage holders and borrowers should stay informed about upcoming rate adjustments and their potential financial impact.

How Do Interest Rates Affect Mortgages?

Tracker and Fixed-Rate Mortgages

Interest rate cuts directly impact mortgage payments for those on tracker mortgages. About 600,000 homeowners with tracker mortgages will see immediate reductions in their monthly payments. A 0.25% cut typically translates to a £29 saving per month, according to UK Finance.

However, the vast majority—80% of mortgage holders—have fixed-rate deals, meaning they won’t see an immediate change. However, when their fixed term ends, they may benefit from lower rates on new mortgage deals.

Current Mortgage Rates

As of 19 February 2025, the average mortgage rates are:

• Two-year fixed mortgage: 5.41%
• Five-year fixed mortgage: 5.23%
• Two-year tracker mortgage: 5.19%

These rates remain higher than those seen over the past decade, meaning many homebuyers and remortgagers are still paying more compared to those who secured mortgages a few years ago.

If you’re looking to remortgage or buy a new home, now is the time to explore your options. Use our ‘How Much Can I Borrow?’ calculator to estimate your potential mortgage amount based on your income and financial situation.

By using our How Much Can I Borrow Calculator, you’ll have the confidence to explore the most competitive mortgage rates available today, and you’ll be in a better position to make a decision about your mortgage that suits your long-term financial goals.

Impact on Credit Cards, Loans, and Savings

Credit Cards and Loans

Interest rate cuts can also lower the cost of borrowing through credit cards, personal loans, and car loans. However, lenders may reduce their rates gradually, meaning immediate savings for borrowers are unlikely.

Savings Accounts

Lower interest rates generally reduce returns for savers. The current average rate for an easy-access savings account is around 3% per year. A base rate cut could mean lower interest payments on savings, impacting those who rely on these returns as a source of income.

If you’re a saver, it may be worth looking into higher-yield savings accounts or fixed-term savings options to secure better returns.

Global Interest Rate Trends

The UK has had one of the highest interest rates among G7 nations in recent years. However, rate cuts are also happening globally:

• The European Central Bank (ECB) reduced its main interest rate from 4% to 2.75% in June 2024.
• The US Federal Reserve currently holds rates in a target range of 4.25% to 4.5% after three consecutive cuts.

These trends suggest a global shift toward lower borrowing costs, though the pace and extent of cuts will vary by country.

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Final Thoughts

The recent interest rate cut to 4.5% is a significant move by the Bank of England, but the path ahead remains uncertain. While future rate cuts are expected, economic conditions and inflation will determine the pace of reductions.

Whether you’re a homeowner, first-time buyer, or contractor looking for a mortgage, now is the time to explore your options. Use our borrowing calculator, compare mortgage rates, and seek expert guidance to make the most of the changing financial landscape.

Stay informed, plan ahead, and make smart financial choices for the future!