Rate cut brings festive cheer to borrowers
The Bank of England delivered an early Christmas present for mortgage holders and homebuyers this week by cutting interest rates to their lowest level in nearly three years.
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The Bank’s Monetary Policy Committee voted to reduce the base rate by a quarter of a percentage point from 4% to 3.75%. The last time the base rate was lower than 4% was in January 2023.
Falling wage growth in the three months to October and a sharp drop in inflation in the year to November made a rate cut in December almost a certainty, with markets currently expecting one or two further cuts next year.
What does this mean for your mortgage?
Several lenders including Barclays. Halifax, Santander and Nationwide reduced their fixed mortgage rates ahead of the base rate decision. This is because fixed rate mortgages are usually heavily influenced by what are known as ‘swap rates’ rather than the base rate. Swap rates are benchmark interest rates which banks charge each other for fixed-rate loans and tend to reflect where markets expect future interest rates to move in future.
Average two and five-year fixed mortgage rates fell over November to reach 4.86% and 4.91% respectively by the start of December, the latest Moneyfacts UK Mortgage Trends Treasury Report shows, the lowest these averages have been since 2022.
Rachel Springall, Finance Expert at Moneyfactscompare, said: “Mortgage rates continue on the downward trend and November was particularly fruitful for fixed rate cuts. The re-pricing by lenders led to the average five-year fixed rate dropping below 5% for the first time in over two years,”
This is good news for homeowners approaching the end of two-year fixed mortgage deals, as the average two-year fixed rate in December 2023 stood at 6.04%, compared to the 2025 average of 4.86%.
However, those coming to the end of longer-term fixed rate mortgages are still likely to face a mortgage shock. Many mortgage deals five years ago were priced at 1.5% or less, so they could be looking at a significant jump in monthly costs when they come to remortgage.
Alice Haine, Personal Finance Analyst at Bestinvest by Evelyn Partners, the online investment service, said: “Locking in a new deal is crucial to avoid reverting onto your lender’s Standard Variable Rate - one of the most expensive forms of mortgage borrowing. Choosing between a fixed or variable rate or a two or five-year term can be complex, which is why an independent mortgage broker can be invaluable.
“Once you’ve secured a deal, stay in touch; brokers can switch you to a better rate right up until two weeks before the term starts – provided conditions improve. Some borrowers have switched multiple times in recent weeks to take advantage of the more competitive landscape.”