The Bank of England has reduced its base interest rate from 4.5% to 4.25% in its latest decision. This move had been widely expected by financial analysts, especially following the US Federal Reserve’s decision to hold its rates steady the night before.
While the rate cut may come as a relief to those with mortgages, it’s less welcome news for savers. A lower base rate often leads to reduced interest on savings accounts, meaning many could see smaller returns on their deposits with banks and building societies.
This marks the fourth rate reduction since August 2024, with the base rate having now dropped a full percentage point from its peak of 5.25%. The previous decision, made on 20 March, was to hold rates, making today’s move a notable shift in direction.
Significantly, two members of the Monetary Policy Committee voted in favour of a more aggressive cut of 0.5%. This suggests there may be growing support within the Bank for more substantial rate reductions in the coming months.
The next interest rate decision is due on 19 June. Based on current market expectations, we could see another two or three cuts of 0.25 percentage points before the end of the year.
If those predictions hold true, the Bank of England’s base rate could drop to 3.5% by the time Christmas arrives. This would continue the trend of gradual easing in monetary policy.
For homeowners, this may result in more competitive mortgage deals, especially on variable and tracker products. Many could see monthly repayments decrease as lenders respond to the change.
On the other hand, savers may need to reassess their options as rates on savings accounts could decline in line with the base rate drop. It’s worth shopping around to find the best available returns.
Overall, we explore what this latest rate cut means for your finances – particularly mortgages and savings – and what might lie ahead as the Bank of England considers further adjustments.
What does this mean for mortgage borrowers?
The Bank of England’s decision to reduce the base rate to 4.25 per cent will be welcomed by many mortgage holders, as lower interest rates generally lead to cheaper borrowing costs.
However, not all borrowers will feel the effects straight away. For most people, this change is unlikely to impact their monthly repayments in the short term.
This is because lenders tend to set their rates based on long-term expectations for interest rates, rather than reacting to a single base rate decision.
Additionally, a large number of mortgage holders are tied into fixed-rate deals—often for two, three, or five years—which means their payments remain the same regardless of changes to the base rate during that period.
Borrowers on tracker mortgages, on the other hand, will benefit immediately. These deals follow the Bank of England’s base rate with an added percentage, such as base rate plus 0.75 per cent, so their payments should fall in line with today’s cut.
According to figures from UK Finance, over 85 per cent of mortgage holders—more than 7 million households—are on fixed-rate deals. The rest are mainly on tracker mortgages or their lender’s standard variable rate (SVR).
Encouragingly, mortgage rates have already been on a downward trend in the lead-up to this rate cut. The average two-year fixed rate has now dropped to its lowest level since September 2022, just before the mini-Budget that triggered market instability and caused a spike in borrowing costs.
For current buyers or those looking to remortgage, competitive fixed-rate deals are now available. Many can access rates close to 4 per cent, depending on their deposit and financial profile.
Nationwide is currently offering two- and five-year fixed deals at 3.84 per cent for those with a deposit of at least 40 per cent. On a £200,000 loan over 25 years, this equates to monthly repayments of around £1,038.
Buyers with a 25 per cent deposit can find fixed rates as low as 3.94 per cent, while those with a 10 per cent deposit may be offered rates from 4.39 per cent.
Ravesh Patel, director and senior mortgage consultant at Reside Mortgages, explains that this base rate cut may help push fixed rates down further. However, he also cautions that lenders are likely to proceed carefully. “It’s important not to expect overnight transformations—lenders will likely remain cautious until there is a clear trajectory of sustained cuts,” he said.
What next for mortgage rates?
For borrowers seeking to understand the future direction of mortgage rates, it’s worth keeping an eye on interest rate forecasts.
In recent weeks, mortgage rates have been steadily falling, and the Bank of England is now expected to reduce interest rates more quickly than originally anticipated.
Forecasts suggest that rates will drop from 4.25 per cent today to 3.75 per cent, or more likely, 3.5 per cent by the end of the year.
Fixed-rate mortgage pricing is largely influenced by Sonia swap rates, which are based on the inter-bank lending rate and future interest rate expectations.
When Sonia swap rates rise, fixed mortgage rates tend to increase, and conversely, when they fall, so do fixed rates.
Over the past month, two-year and five-year swap rates have decreased from above 4 per cent to just above 3.5 per cent.
Given that the lowest residential mortgage rates often follow the movement of Sonia swaps, this decline suggests that further cuts to mortgage rates could be on the horizon.
However, it’s important to note that future interest rate cuts are already factored into the pricing of fixed-rate mortgages to some extent, and the actual trajectory can change depending on how future economic conditions unfold.
Rachael Hunnisett, director of mortgage distribution at lender April Mortgages, warns that borrowers should be cautious not to confuse base rate changes with significant reductions in fixed mortgage rates.
“While a base rate cut is welcome news for many, much of this move has already been priced into the market,” she explains.
Looking ahead, Hunnisett believes that mortgage rates may fall further, but not by a substantial amount.
“Markets have already priced in a series of base rate cuts, and lenders have adjusted their pricing accordingly,” she says. “That means any further reductions in mortgage rates are likely to be limited unless there’s an unexpected shift in economic data.”
Her advice to borrowers is clear: “Don’t base your financial plans on the hope of finding cheaper deals in the future. It’s speculative and could ultimately backfire.”
What does this mean for savers?
The base rate plays a key role in determining how much interest savers can earn on their money. Typically, savings rates tend to rise when the base rate increases, and conversely, fall when the base rate decreases.
With the recent reduction of the base rate to 4.25 per cent, it’s almost certain that savers will experience a decline in the best available savings rates.
Those with funds in easy-access accounts are most likely to feel the impact of these rate cuts.
Currently, the best easy-access accounts offer around 4.75 per cent, closely reflecting the previous base rate of 4.5 per cent.
Rachel Springall, a finance expert at Moneyfacts Compare, highlights this concern, stating: “Savers with money in easy-access accounts, notice accounts, or ISA equivalents are particularly vulnerable to base rate cuts, as variable rates tend to drop in response.”
James Blower, founder of The Savings Guru, also shares his insights, saying: “Savers should anticipate hearing from their provider soon, likely within this month, with news of cuts to their rates.”
He goes on to add, “Moreover, the best buy rates, which are currently around 4.75 per cent, are expected to decrease by at least 0.25 per cent.”
Blower concludes, “We expect the best buy rates to fall below 4.5 per cent this month.”
What next for savings rates?
If the base rate drops to 3.75 per cent or even 3.5 per cent by the end of the year, as market forecasts suggest, fixed-rate bonds are likely to be the savings accounts most affected.
At present, the best one-year bond offers an interest rate of 4.55 per cent. This is a notable decrease from the peak of 6.2 per cent in October 2023.
James Blower comments: “If the base rate continues to be cut further this year, it’s likely that we will see a significant reduction in fixed rates during the second half of 2025.”
What should savers do now?
Savers should be vigilant about their savings rates, whether it’s an easy-access account, a fixed-rate account, or an ISA, especially in the face of fluctuating interest rates.
If your savings aren’t earning as much as they could, consider transferring them to an account offering a better rate.
Rachel Springall suggests: “Now is a good time for savers to think about a fixed-rate bond or ISA to shield themselves from potential rate cuts.”
She also advises savers to make the most of their ISA allowance, as it has been a month since the start of the new tax year. With competitive cash ISA rates available, it’s a good idea to act before they disappear.
James Blower further adds: “Keep an eye on how easy-access rates change with your savings provider, and consider switching if your current rate is cut more than the base rate or falls behind the best buy rates available.”
Best savings rates and how to find them
The best easy-access savings deals currently pay around 4.75 per cent. Atom Bank is offering a market-leading easy-access deal with an interest rate of 4.75 per cent. If someone were to place £10,000 in this account, they could expect to earn £475 in interest over the course of a year, provided the rate remains the same.
For those who have cash they don’t need immediately and can lock it away for one or two years, fixed-rate savings might be a better option.
The best one-year deal is offered by Access Bank, paying 4.55 per cent. A saver placing £10,000 into this account will earn a guaranteed £465 in interest over the year. Additionally, it comes with full protection under the Financial Services Compensation Scheme (FSCS) up to £85,000 per person.
Other providers, such as Cynergy Bank, GB Bank, and Tandem Bank, are also offering 4.55 per cent on their one-year fixed savings accounts. All of these accounts come with FSCS protection.
For those looking to lock in savings for a longer period, the best two-year bond currently pays 4.48 per cent, offered by JN Bank. This provider also offers the best three and five-year bonds, both of which also pay 4.48 per cent.
Savers should also consider using a cash ISA to protect the interest they earn from being taxed. Moneybox is offering a market-leading 5.71 per cent on its easy-access cash ISA for new customers. However, it includes a 1.51 per cent bonus for the first three months, after which the rate will drop to 4.2 per cent.
This deal is beaten by CMC Invest, which offers 5.7 per cent, including a 0.85 per cent bonus for the first three months. After this bonus period, the rate will drop to a more competitive 5.06 per cent.
On the other hand, Trading 212 offers a cash ISA paying 5.07 per cent, which includes a 12-month bonus of 0.72 per cent.
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