Bank of England cuts base rate to 4.50% - what does this mean for your mortgage and savings?

Borrowers were left disappointed after the previous base rate reduction preceded rising mortgage rates.

The Bank of England’s Monetary Policy Committee (MPC) made an emphatic start to 2025 after slashing the base rate to 4.50% in its first meeting of the year. Today’s 0.25 percentage point cut comes as inflation unexpectedly eased to 2.5% in December 2024 and sees the UK’s central interest rate fall to its lowest level in more than 18 months.

Will fixed mortgage rates fall?

Typically, this would be welcome news for mortgage borrowers as lenders often readjust their pricing in response to base rate forecasts. However, many were left disappointed after rates increased following the last cut in November 2024. This resulted in the average rate charged by a two-year fixed deal rising from 5.39% to 5.52% between November and the start of this month, while the average five-year fixed rate saw a steeper climb from 5.09% to reach a six-month high of 5.32% over the same period.

“This demonstrates how fixed mortgages have other influences at play, and a base rate cut does not necessarily result in a surge of lenders cutting rates to their fixed range,” explained Rachel Springall, Finance Expert at Moneyfactscompare.co.uk. She cited “recent volatility in swap rates” as a key driving force behind lenders hiking rates at the start of this year.

While the swap market has since calmed, there are other factors that can indirectly affect the cost of borrowing, including global conflicts and political upheaval. But, with 1.8 million fixed mortgage deals set to expire in 2025 (according to UK Finance), Oliver Dack, spokesperson for Mortgage Advice Bureau, urged borrowers not to delay refinancing.

“It’s important borrowers focus on the factors within their control rather than spend too much time deliberating how the mortgage market might react to external pressures, as this can be hard to predict,” he said.

“Many will be relieved to see the base rate reduced, but bear in mind this will mostly benefit those on a tracker deal, and it could still be some time before fixed mortgage rates fall considerably. Borrowers now coming to the end of a fixed deal may therefore find it more cost-effective to lock in a new fixed rate instead of waiting indefinitely for prices to slump while sitting on a lender’s Standard Variable Rate,” Dack continued.

Although the average Standard Variable Rate (SVR) observed a slight decline in the month to February, it remains eye-wateringly high at 7.78%. At this rate, borrowers would pay £355 more each month than if they had taken out a typical two-year fixed deal (based on a £250,000 mortgage repaid over 25 years).

Another blow to savers

Meanwhile, savers may feel they’ve been dealt another blow after being hit hard by two similar base rate reductions in the latter half of 2024. While the average easy access savings rate saw a marginal uptick from 2.90% to 2.92% between January and February, typical returns in the sector dropped 0.25 percentage points year-on-year.

“It has already been proven that cuts to the Bank of England base rate set the wheels in motion for the biggest banks in the country to cut rates, showing loyalty does not pay,” said Springall. She explained easy access accounts from some of the UK’s biggest high street banks currently pay just 1.66%* on average.

In contrast, many challenger banks offer better returns, but those making the move to a higher-paying alternative should be mindful of their tax-free savings allowance; higher-rate taxpayers could easily find themselves exceeding their £500 Personal Savings Allowance (PSA) if they earn 5.00% on a balance of £10,000 or more, for instance. As a result, Springall said it would be “little surprise for cash ISA deposits to thrive this year as hordes of savers utilise their tax-free wrapper”.

Nevertheless, she emphasised even lesser-known brands can’t avoid making cuts, especially “if they sit too far ahead of their peers and the market sentiment for lower interest rates prevails in the months ahead”.  Savers will need to keep a close eye on the market in the weeks to come and, if rates drop, may want to consider switching to a more competitive variable account or securing guaranteed returns with a fixed bond to see their money grow in real terms against inflation.

^{* High street banks include Bank of Scotland, Barclays Bank, Halifax, HSBC, Lloyds Bank, NatWest, Royal Bank of Scotland and Santander. Averages collected from gross interest rates paid across all live easy access accounts with these brands based on a £10,000 deposit, latest rates as at 3 February 2025.}