Interest charges reduce to 4.75%: What it means on your mortgage and financial savings

The Bank of England has lowered interest rates by 0.25 basis points to 4.75 per cent today, as it unanimously voted to deliver its second cut this year.

In September, the Bank of England opted to hold the base rate at 5 per cent, having made its first cut the previous month.

Interest rates have now fallen by 0.5 basis points since August, down from a high of 5.25 per cent.

It is thought that falling inflation played a major role in swaying the majority of Monetary Policy Committee members to vote in favour of a cut this month. The vote was 8-1, with one member – Catherine Mann – opting for a hold. 

The most recent reading from the ONS showed inflation falling to 1.7 per cent in the 12 months to September, down from 2.2 per cent in August.

This represents the first time since April 2021 that inflation has fallen below target and it also came in below the market forecasts of 1.9 per cent.

We explain what the Bank of England’s decision to cut to 4.75 per cent means for your mortgage and savings – and whether rates will be cut again soon.

What does this mean for mortgage borrowers?

Today’s decision to cut the base rate to 4.75 per cent will probably be music to mortgage borrowers’ ears, as falling interest rates tend to lead to lower mortgage rates.

But the reality is that while some borrowers will see benefits, for the majority it will make little difference – at least in the short term. 

Base rate peaked at 5.25 per cent in September 2023 after 14 consecutive hikes from December 2021. 

As the rate cycle turned, mortgage rates have fallen and the decline accelerated over the summer, with money markets anticipating more rate cuts to come and lenders seeing their own funding costs decrease. 

Mortgage rates were falling up until the start of last month, but have come to somewhat of a standstill since then, with some lenders even increasing rates in recent weeks.

Lenders usually base their pricing on the longer-term trajectory of interest rates, rather than reacting to individual base rate decisions – and therefore this cut is unlikely to change things substantially.

This base rate cut was broadly predicted and therefore already priced into fixed mortgage rates.

In the long run, interest rates are now expected to fall to around 4 per cent by the end of 2025 before eventually settling at around 3.5 per cent.

Rachael Hunnisett, director, longer-term lender April Mortgages said: ‘The rate cut today was widely expected, as the Bank of England had previously indicated they would consider base rate cuts if inflation continued to decline.

‘While this is a positive step for the economy, the balance between controlling inflation and managing central bank policy remains delicate.

‘The anticipated November rate cut was already priced into market expectations, making today’s adjustment well-aligned with long-standing projections.

‘In these volatile times, it’s crucial for borrowers to consider their long-term plans and risk tolerance when selecting a fixed-rate product.’

> Mortgage calculator: Check the best rates based on your property value

What are today’s mortgage rates?  

According to rates monitor Moneyfacts, the average two-year fixed mortgage rate is 5.4 per cent, and the average five-year fix is 5.11 per cent.

It is a significant improvement on this time last year, when the average two-year fixed mortgage rate was 6.29 per cent and the average five-year fix was 5.86 per cent.

However, it is still much higher than in 2020-21 when, at times, average rates were less than 3 per cent.

Many borrowers can get rates lower than today’s averages if they shop around, especially if they have substantial equity in their home and a good credit history. 

The best two-year purchase rates are just below 4 per cent and the best two-year remortgage rates just above 4 per cent, with the five-year equivalents around 3.8 per cent.

Most people with a mortgage won’t be immediately affected by any base rate changes, as they are on fixed rates which won’t change until the end of their fixed term.

Around 82 per cent of households are on fixed rate mortgages, according to UK Finance. That equates to almost 7 million households.

However, some 8 per cent of households are on tracker mortgages – close to 700,000 in total. 

What does it mean for tracker mortgages?  

Those on tracker mortgages should see an immediate benefit from the base rate cut, as these rates follow the Bank of England’s base rate plus a set percentage, for example base rate plus 0.75 per cent.

The average outstanding mortgage held on a tracker is currently £139,124, according to UK Finance. The average rate is 6.44 per cent meaning a typical tracker mortgage borrower was paying £1,032 a month.

Now that the base rate has been cut by 0.25 basis points, this should result in the typical tacker repayment mortgage falling to 6.19 per cent and monthly payments falling to £1,012 – a £20 monthly saving.

As for those on an interest-only tracker mortgages, the average borrower should see a monthly saving of around £29, according to UK Finance.

Borrowers on variable rates such as ‘discount’ rates and also standard variable rates could also have benefited from a base rate cut. 

Standard variable rates are lenders’ default rates that people tend to move on to if their fixed or other deal period ends and they do not remortgage on to a new deal.

These can be changed by lenders at any time, and will usually rise and fall when the base rate does – but they can go up or down by more or less than the Bank of England’s move.

Ravesh Patel, director and senior mortgage consultant at Reside Mortgages said: ‘A modest base rate reduction could lead to small decreases in mortgage rates, particularly for variable or tracker rate holders. 

‘Fixed-rate products may also see slight reductions, which could provide an opportunity for borrowers to lock in somewhat lower rates. 

‘This small cut, however, may not significantly impact overall monthly payments, as lenders will likely remain cautious given economic uncertainties.’

Patel also thinks the rate cut should be welcome news to buy-to-let investors who now find they are able to borrow slightly more.

‘But-to-let stress testing has increased significantly as a result of lenders increasing their standard variable rates (SVRs), which are influenced by the base rate,’ added Patel.

‘Therefore the fall in base rate could mean a proportional fall in SVRs and the stress test which could improve buy-to-let mortgage affordability.’

What next for mortgage rates?

Market interest rate expectations are reflected in swap rates. A swap is essentially an agreement in which two banks agree to exchange a stream of future fixed interest payments for another stream of variable ones, based on a set price.

These swap rates are influenced by long-term market projections for the Bank of England base rate, as well as the wider economy, internal bank targets and competitor pricing.

Current swap rates suggest that interest rates will be lower over the coming years, but not dramatically so.

Five-year swaps are now hovering around 4 per cent and two-year swaps at 4.22 per cent – both trending well below the current base rate.

The lowest five-year fixed rate mortgage is currently 3.79 per cent while the lowest two-year fix is 3.96 per cent – it is rare for the lowest rates to be below the equivalent swaps like they are now.

If swap rates remain where they are currently, we are likely to see mortgage rates rise than fall over the coming weeks.

Nicholas Mendes of John Charcol thinks that even after today’s meeting, the outlook for future rate cuts remains uncertain. 

‘The Bank of England’s final monetary policy decision for the year is scheduled for 19 December, with the first review of 2025 set for 6 February. 

‘After this week’s cut, the Bank is expected to settle into a more measured quarterly rate-cutting pace, likely less aggressive than that of the Federal Reserve and the ECB.

‘This pause will give the Bank time to assess the economic impact of the increased Government borrowing announced in the recent Budget.

‘Market expectations have already adjusted, with forecasts now suggesting two or three rate cuts in 2025, down from earlier projections of four or five.’

That said, looking ahead mortgage brokers are expecting rates will fall slightly as we head into 2025.

‘Given current trends, we may expect some rate stabilisation or modest reductions in the latter half of 2024 or first half of 2025 if inflation continues to fall,’ said Ravesh Patel of Reside Mortgages.

‘However, economic unpredictability, particularly surrounding inflation and consumer spending, makes any significant drop unlikely in the immediate term. 

‘The market may remain cautious, with lenders setting rates to hedge against potential volatility.’

Nicholas Mendes added: ‘I expect mortgage rates to resume their downward trend before the end of the year, likely returning to the best rates we’ve seen recently, with further improvements anticipated into next year.

‘However, borrowers should keep in mind that current fixed mortgage rates already reflect some of the anticipated Bank Rate cuts over the coming year. 

‘As a result, I foresee the lowest fixed rates stabilising around the low 3 per cent range next year.’

What does this mean for savers? 

The base rate affects how much interest savers can earn on their money. In general, savings rates rise when the base rate is rising, and fall when it is falling. 

Savings rates have been falling over the last month, as providers have been busy pricing in an anticipated base rate cut to savings deals. 

Fixed-rate deals have been particularly badly hit by the base rate falling. They dropped to lowest levels in over a year last week, data from Moneyfacts shows. 

Experts predict this trend will continue over the next six months. 

The last time the Bank of England moved to cut the base rate to 5 per cent in August from 5.25 per cent, This is Money analysis found over 100 savings had had their rates slashed or were pulled from the market altogether in the week after the base rate cut.

The fact that the base rate has been cut to 4.75 per cent means it is unlikely savers will see many more stellar savings rates paying more than 5 per cent. Only a handful of these are available now in the easy-access market. 

However, it can take a few weeks for providers to make a move in response. 

What next for savings rates? 

There is one more base rate decision meetings this year, meaning one more opportunity for the Monetary and Policy Committee to cut the base rate. 

However, experts had widely predicted that interest rates will land at 4.75 per cent by the end of 2024. 

Savings rates have been falling over the last year and, unfortunately for savers, this issue is only going to get worse in the coming six months.

The average easy access rate has fallen from 3.15 per cent since August 2024, according to rates scrutineer Moneyfacts Compare. It now stands at 3.03 per cent.

What savers can expect from savings rates now the base rate has been cut to 4.75 per cent depends on the type of savings account.  

James Blower, founder of website Savings Guru said: ‘Expect short-term fixed rates (three and six months) to drop below 4.75 per cent. One year rates are already largely pricing the cut in but expect the four providers paying over 4.75 per cent to pull or cut next week. 

‘Best buy fixed rates are likely to consolidate around 4.6 to 4.7 per cent during November and fall slowly over the rest of the year. With the base rate expected to drop to 4.5 per cent in February, One year rates are likely to head in this direction. 

‘Longer-term fixed rates should hold up because markets were pricing in a base rate of 3.75 per cent by the end of 2025 – this is looking increasingly unlikely now so this should support three to five year rates and mean we are likely to see less cuts here.’

Andrew Hagger, director of Money Comms said: ‘If you’ve got some cash you’re happy to lock away for a fixed rate deal for a year or two, now seems like a good time to make that move.’

It’s a similar story with easy-access accounts – six months ago there were 15 easy-access accounts paying 5 per cent or more – now there is just one.

Hagger said: ‘I think we’ll see most of the easy-access best buy deals marked down within a couple of weeks – repriced around 4.5 per cent to 4.6 per cent – you may get slightly higher than this but they will probably come with withdrawal restrictions.’

Blower said: ‘Easy-access rates were already being changed in anticipation of a base rate cut. Oxbury withdrew their easy access paying 4.87 per cent on Tuesday and OakNorth have cut from 4.82 per cent to 4.5 per cent yesterday. 

‘Expect to see the best buy rate to drop to something around 4.7 per cent to 4.75 per cent with the top 10 rates likely to be within the range of 4.45 per cent to 4.6 per cent.’ 

Easy-access Isas have bucked the trend of having rates slashed, with Moneybox and Trading 212 yesterday boosting their rates to 5.17 per cent and this trend could continue until the end of November, one expert said. 

Blower said: ‘Easy-access Isas are being propped up by providers who are trying to acquire new customers so this market is slightly artificial. 

‘The likes of Trading 212 and Moneybox could continue to pay over the base rate and easy-access Isa best buys are unlikely to fall as quickly as their taxable counterparts. Expect it to take most of November before the easy access Isa market settles down.’

> Find the best savings rates using This is Money’s independent tables 

Which banks offer the best savings rates? 

According to Moneyfacts, the average easy-access rate is 3.03 per cent, and the average one-year fix is 4.22 per cent.

Average rates across easy-access, notice accounts and their cash Isa equivalents have fallen in the last month, but remain higher than a year ago.  

The average easy access rate has fallen from 3.15 per cent since August 2024 while the average easy access Isa rate has fallen from 3.36 per cent.

Savers can get rates higher than today’s averages if they are willing to shop around. 

The best easy-access deals, without any restrictions, pay around 4.86 per cent. If you’re getting a lot less than this at the moment, you should consider jumping ship to a provider that pays more.

Chetwood Bank is now offering a market-leading easy-access deal paying 4.86 per cent.

Someone putting £10,000 in this account could expect to earn £486 in interest after a year.

Those with cash they won’t immediately need over the next year or two should consider fixed-rate savings.

The best one-year deal is offered by Access Bank paying 4.8 per cent. A saver putting £10,000 in this account will earn a guaranteed £489 interest over one year. It comes with full protection under the Financial Services Compensation Scheme up to £85,000 per person. Union Bank of India also pays 4.8 per cent. 

Other top one-year savings accounts are Smartsave which is paying 4.76 per cent, while Atom and Close Brothers and Gatehouse Bank are all paying 4.7 per cent. All offer FSCS protection.

Savers should strongly consider using a cash Isa to protect the interest they earn from being taxed.

James Blower said: ‘Maximise your Isa allowance if you haven’t already – the best easy access Isa rates beat the best taxable accounts currently so take advantage.’

With interest rates higher and the personal savings allowance stuck at £1,000 for basic rate taxpayers and just £500 for higher rate taxpayers, it’s become much easier to fall into the savings tax trap.

Meanwhile, if you pay 45 per cent tax, you get no personal savings allowance at all.

Those wishing to keep their money in an easy-access cash Isa which they can dip in and out of can get 5.1 per cent with Trading 212’s flexible cash Isa.

The top one-year fixed-rate cash Isa is paying 4.46 per cent interest, while the top two-year fix is paying 4.3 per cent.