The Bank of England reduced its base interest rate to 4.75% in November, marking the second rate cut in 2024 following the August reduction to 5%.
Interest rates significantly impact mortgages, loans, credit cards, and savings accounts for millions of people across the UK. Although borrowing costs remain high, these rate cuts may offer some relief.
What Are Interest Rates, and Why Do They Change?
Interest rates reflect the cost of borrowing money or the reward for saving it.
The Bank of England’s base rate influences the rates lenders charge for loans and mortgages, as well as the interest paid on savings.
The Bank adjusts rates to control inflation, which measures the rate at which prices rise over time.
- When inflation is high: Raising rates can reduce spending and slow demand, helping lower inflation toward the Bank’s 2% target.
- When inflation is low or stable: The Bank may hold or cut rates to encourage spending and support economic growth.
When Will UK Interest Rates Drop Further?
After holding steady at 5.25% for months, the Bank of England cut rates twice in 2024, bringing them to 4.75%. While rates are lower than in the 1980s and 1990s—when they reached as high as 17%—they remain elevated compared to recent years.
Inflation, which peaked at 11.1% in October 2022, has slowed. In October 2024, the Consumer Price Index (CPI) rose by 2.3%, up from 1.7% in September, putting inflation back above the Bank’s target.
The Bank must carefully balance the need to manage inflation against the risk of slowing economic growth. Governor Andrew Bailey cautioned that further rate cuts are likely to be gradual.
How Much Could Interest Rates Fall?
Future rate cuts depend on sustained inflation control. However, new government spending plans announced in Chancellor Rachel Reeves’ October Budget have tempered expectations of rapid cuts.
Global factors, such as the economic impact of U.S. President Donald Trump’s trade policies and increased employer costs in the UK, may also influence the Bank’s decisions.
How Do Interest Rates Affect You?
Mortgage Rates
- About a third of UK households have a mortgage. For the 600,000 homeowners with “tracker” mortgages, rate cuts directly reduce monthly repayments.
- Most mortgage holders (over 80%) have fixed-rate deals, which are unaffected immediately but could benefit from lower rates on future deals.
Mortgage rates remain high. The average two-year fixed rate is 5.39%, while five-year deals average 5.09%, significantly higher than rates a few years ago.
Fixed-rate deals with interest rates below 3% will continue expiring annually until 2027, meaning many borrowers will face higher costs.
Credit Cards and Loans
Credit card and loan rates may decrease gradually if banks adjust to lower borrowing costs. However, lenders often delay passing on these savings.
Savings Accounts
Lower base rates can reduce returns on savings accounts. The current average easy-access savings rate is about 3%, and further cuts could impact savers relying on interest for income.
Interest Rate Trends in Other Countries
Interest rates are falling globally:
- Eurozone: The European Central Bank reduced its main rate to 3.5% in September 2024, following a prior cut to 3.75% in June.
- United States: The Federal Reserve dropped its key rate to 4.5%-4.75% in November, marking its second reduction this year.
While the UK continues to adjust its monetary policy, rates remain among the highest in the G7, reflecting ongoing efforts to stabilize the economy.
How Much Can You Borrow as a Locum Doctor?
Wondering how much you can actually borrow? The answer varies based on your income, deposit size, and credit profile. While every lender has different criteria, a general rule of thumb is that you can borrow around 4 to 5 times your annual income. In some cases, specialist lenders may extend this to 6 times your earnings if you have a strong application.
Don’t waste time guessing. Use our “How Much Can You Borrow” calculator to get an instant estimate of your borrowing potential. This tool considers factors like your income, deposit, and existing debts to give you a personalised estimate in seconds.
Understanding how much you can borrow is the first step in setting realistic property goals, so make sure to check your borrowing capacity before house hunting.
What’s Next?
As the Bank of England monitors inflation and economic performance, borrowers and savers alike should prepare for slow and cautious changes in rates. For now, the impact of rate cuts will depend on individual circumstances and market conditions.