Interest charges held at 4.5%: What it means to your mortgage and financial savings

The Bank of England has held interest rates at 4.5 per cent as it continues to tread carefully amid fears of resurgent inflation.

The decision came as little surprise to financial markets, with a pause wide predicted by analysts. Eight members of the Monetary Policy Committee voted to pause, and one for a cut. 

Its previous decision, last month, was to cut rates from 4.75 to 4.5 per cent, taking base rate to 0.75 percentage points below its 5.25 per cent peak. 

The next decision will take place on 8 May, with much hinging on what happens to the rate of inflation, but also the health of the overall economy.

Today’s decision to hold rates may be seen as bad news for many households who will be hoping to see the cost of their mortgages reduce.

However, it will likely be received positively by savers who may have noticed their savings rates slashed in recent months.

We explain what the Bank of England’s decision to hold rates at 4.5 per cent means for your mortgage and savings – and whether rates will be cut again soon.

> Five vital Bank of England charts on growth, inflation and rates 

What does this mean for mortgage borrowers? 

Today’s decision to hold the base rate at 4.5 per cent will probably seem like bad news for mortgage borrowers.

The reality is that most borrowers would have seen little benefit even if rates had been cut.

Lenders usually base their pricing on the longer-term trajectory of interest rates, rather than reacting to individual base rate decisions.

Interest rates are expected to fall to around 4 per cent by the end of 2025 before eventually settling at around 3.75 per cent.

Ravesh Patel, director and senior mortgage consultant at broker Reside Mortgages thinks the base rate hold means borrowers can expect more of the same. 

‘For mortgage borrowers, this means little immediate change,’ said Patel. ‘Lenders had already priced in expectations that rates would stay put for now, so mortgage rates are unlikely to move much in the short term.

‘Anyone due to remortgage should plan ahead and explore their options, as lenders are still competing for business, which could lead to better deals.’

Aaron Strutt, of mortgage broker Trinity Financial shares this view and cautions borrowers against favouring shorter term fixed rates in the hope that interest rates will be lower when they come to remortgage.

‘The MPC is holding off making a decision to cut borrowing costs because inflation is above the target amount,’ said Strutt.

‘Mortgage rates have been coming down recently, so there is still a good choice of fixed rates priced around 4.25 per cent for borrowers with a range of deposit sizes – which is below the current base rate. 

‘It seems likely that the base rate will come down a couple of times this year, but as we know, the money markets can change quickly so there are no guarantees.’

‘While most borrowers are taking two-year fixes, opting for a three- or five-year fix isn’t such a bad idea. Payment security is really important in these challenging economic times.’

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

What next for mortgage rates?

The lowest fixed rate mortgage deals continue to hover close to the 4 per cent mark.

HSBC is offering a 3.98 per cent five-year fix to its Premier banking customers and Barclays is offering a 3.96 five-year deal to those buying the most energy efficient homes.

For other home buyers with the biggest deposits, a number of the major lenders are offering rates below 4.1 per cent on five-year fixes while two-year fixes are marginally more expensive.

Even for people buying with a 10 per cent deposit, it is now possible to get as low as 4.62 per cent. 

On a £200,000 mortgage being repaid over a 25 year repayment term, a 4.62 per cent rate would equate to paying £1,125 a month.

The future direction of mortgage rates hinges on what markets perceive to be the future of interest rates and the future of interest rates hinge not just on the rate of inflation, but also on the health of the overall economy.

The 0.1 per cent month-on-month fall in real GDP in January highlighted the weakness of the economy. This may encourage MPC members to consider rate cuts in the future.

However, the ONS recently revealed that inflation rose 3 per cent in the 12 months to January – above the 2.8 per cent that markets forecast. Higher than expected inflation could lead to MPC members refraining from rate cuts in the future.

‘The best-case scenario is that inflation continues to fall as expected, allowing the Bank to start cutting rates in the summer, which would bring mortgage rates down gradually,’ said Patel. 

‘The worst case – excluding any major economic shocks – is that inflation proves stickier than forecast, delaying cuts until later in the year and keeping mortgage rates higher for longer.’

At present, market forecasts point to interest rates finishing the year at 4 per cent.

However, some major banks have predicted they could finish below this level in recent months.

For example, Santander said interest rates would fall to 3.75 per cent by the end of 2025 while Barclays forecast rates will fall to 3.5 per cent.

Meanwhile, analysts at Morgan Stanley recently predicted UK interest rates will fall to 3.5 per cent by the end of this year, while Goldman Sachs said interest rates will fall to 3.25 per cent by the middle of next year. 

Mortgage advisor, Aaron Strutt, thinks all forecasts should be taken with a pinch of salt. He advises borrowers to not base decisions on mortgage rates falling in the near future.

‘The best-case scenario for mortgage borrowers is that the base rate will be 3.75 per cent by the end of this year, but it seems unlikely,’ added Strutt.

‘The number of people opting for two-year fixes in anticipation of cheaper borrowing costs has increased as the base rate and fixed rates are expected to get cheaper over the near term. 

‘Some of the big investment banks have been predicting some pretty significant base rate reductions, but personally, I wouldn’t bet on it. 

‘The economy would need to get pretty bad for the base rate to drop to 3 per cent by September this year as one bank predicted not long ago.

‘While most borrowers are taking two-year fixes, opting for a three- or five-year fix isn’t such a bad idea. Payment security is really important in these challenging economic times.’

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.

When the Bank of England cut the base rate to 4.75 per cent in August from 5 per cent, This is Money analysis found at least 30 savings accounts had had their rates slashed or were pulled from the market altogether.

Fixed-rate deals were particularly badly hit by the base rate cut to 4.75 per cent in December.

The good news is that, with the base rate being held at 4.5 per cent, banks are very unlikely to move to cut rates immediately.

However, variable rates have already dropped over the past month, according to rates scrutineer Moneyfacts Compare. The average easy-access account is now paying 2.85 per cent, down from 2.92 per cent in February.

The biggest banks are paying an average of 1.66 per cent across accounts, while challenger banks are pushing rates higher.

Rachel Springall, finance expert at Moneyfacts says: ‘There are still savers out there who fail to move their cash from accounts where loyalty does not pay, such as with the biggest high street banks.

‘The brands covered by the Financial Services Compensation Scheme (FSCS) have the same protections as the high street banks, so savers should explore alternative providers that offer better value.’

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

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

The best easy-access deals, without any restrictions, pay around 4.6 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.

Vida Savings is now offering a market-leading easy-access deal paying 4.63 per cent.

Someone putting £10,000 in this account could expect to earn £463 in interest after a year, if the rate remains the same.

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 Birmingham Bank paying 4.6 per cent. A saver putting £10,000 in this account will earn a guaranteed £460 interest over one year. It comes with full protection under the Financial Services Compensation Scheme up to £85,000 per person.

Other top one-year savings accounts are Cynergy Bank, Secure Trust and Vanquis Bank which are paying 4.6 per cent, while Access Bank, Close Brothers, Hodge Bank and Shawbrook Bank are paying 4.58 per cent. All offer FSCS protection.

Savers should also strongly consider using a cash Isa to protect the interest they earn from being taxed. But make sure you shop around as providers have slashed rates.

An easy-access cash Isa, which paid 3.92 per cent in February on average, is now 3.79 per cent.

‘A dip in rates should not deter savers from taking full advantage of their Isa allowance before the 2024/25 tax-year ends,’ says Springall. 

‘The stickiness of inflation, coupled with a freeze to income tax thresholds and tax-free savings allowances, means it’s more vital than ever for consumers to be proactive with their money and ensure they are earning a decent return.

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.

Moneybox and Trading 212 are currently offering a market-leading 5.25 per cent on their easy access cash Isas for new customers. Moneybox’s deal includes a 0.62 per cent bonus for 12 months, while Trading212’s offers 0.75 per cent for 3 months. 

It is followed by Chip, offering 5.03 per cent which includes a 0.71 per cent bonus for three months if you use the code 3MONTHSISA. The rate will drop back down to 4.32 per cent after three months.