The Bank of England delivered an early festive gift to millions of borrowers on Thursday, slashing the base interest rate from 4% to 3.75%. This marks the fourth reduction this year, following similar moves in February, May, and August.
Will Your Mortgage Payments Fall?
For most UK homeowners, the immediate answer is no. More than 7.2 million (86%) of Britain's 8.4 million residential mortgages are on a fixed rate, meaning their monthly repayments remain unchanged.
However, the cut brings direct relief for the 533,000 homeowners with a base-rate tracker mortgage. Their payments will decrease in line with the Bank's decision. According to UK Finance, a typical tracker customer with a £138,000 balance will see their monthly payment drop by around £28.77.
The 509,000 borrowers on a lender's Standard Variable Rate (SVR) face a waiting game. While lenders are expected to reduce their SVRs, they are not forced to follow the Bank. If they do, UK Finance estimates a typical monthly saving of £13.88, given the smaller average loan size on these products.
New Deals and the Remortgage Landscape
The cost of new fixed-rate mortgages has been trending down, and brokers expect this cut to fuel further competition. Simon Gammon of Knight Frank Finance noted lenders have been trimming rates for weeks and predicts a "highly competitive January," with banks undercutting each other. He suggested two-year fixed rates could dip below 3% by spring.
Currently, the average new two-year fix is 4.82%, but the best rates for those with significant equity are near 3.6%. This is a stark contrast to the average rate of about 5.7% available in early 2024. Mark Harris of SPF Private Clients advised those remortgaging soon to book a rate up to six months in advance, with the option to switch if a better deal emerges.
A significant group poised to benefit are the 1.8 million people whose fixed-rate deals expire in 2026. Mortgage specialist Lorna Hopes of Smith & Pinching highlighted that those coming off a two-year deal could remortgage onto a much lower rate. However, many whose five-year fixes end soon will still face a sharp payment increase, moving from an average 2021 rate of 2.75% to today's average of 4.9%.
The Outlook for Savers
While savings returns aren't directly tied to the base rate, the reduction is likely to be passed on to many with easy-access or variable-rate accounts. Before the cut, the average easy-access rate was 2.56%, though top "best buy" accounts paid up to 4.5%.
For those willing to lock money away, fixed-rate bonds still offer some of the highest returns, with top one-year deals paying just over 4.5%. Savers are advised to act quickly, as these rates may now start to fall.
In summary, the rate cut accelerates a positive trend for borrowers seeking new deals, particularly those remortgaging in 2026, while savers may need to shop around to protect their returns.
