The Bank of England has chosen to maintain its base interest rate at 5 per cent, opting not to follow the US Federal Reserve, which cut its rate by half a percentage point the previous day. Despite some expectations for a reduction, the Bank decided to hold firm after last month’s cut from 5.25 per cent to 5 per cent. The decision came as the latest CPI inflation data showed inflation holding steady at 2.2 per cent, a factor that played a role in the Bank’s choice to pause further rate cuts.

In the vote, eight out of the nine members of the Bank’s Monetary Policy Committee (MPC) voted to keep the rate at 5 per cent, while only one member advocated for a cut. This split suggests that while there is some consideration for easing monetary policy, the majority felt it was prudent to hold off for now. The next meeting to discuss interest rates is scheduled for 7 November, shortly after the Chancellor delivers the autumn Budget, which could further shape economic policy.

The decision to maintain the 5 per cent rate has significant implications for mortgage holders and savers. For those with variable-rate or tracker mortgages, the decision means no immediate relief from higher payments, while those on fixed-rate deals are watching closely for signs of a future cut. Savers, on the other hand, may continue to benefit from higher interest on their deposits, though any future rate cuts could see those benefits reduced.

Looking ahead, the question remains whether the Bank will cut rates again soon. Much will depend on economic indicators, inflation trends, and broader global economic conditions. With the MPC closely watching inflation and the economic outlook, November’s meeting could be crucial in determining the direction of rates and the impact on mortgages, savings, and overall financial planning for UK households.

What does this mean for mortgage borrowers?

The Bank of England’s decision to keep the base rate at 5 per cent today comes exactly one year after pausing its cycle of interest rate hikes. The base rate had reached its peak of 5.25 per cent in September 2023, following 14 consecutive increases that began in December 2021.

As the rate-hiking cycle came to an end, mortgage rates began to ease, with a notable acceleration in the summer as markets anticipated more rate cuts. Lenders also saw their own funding costs fall, which contributed to lower mortgage rates. Borrowers looking to remortgage or purchase a property will be relieved that today’s base rate hold is not expected to halt the recent decline in mortgage rates.

However, mortgage experts are cautioning that the pace of rate cuts by lenders may slow down in the short term. Nicholas Mendes, mortgage technical manager at John Charcol, noted that today’s decision will not disrupt the overall downward trend in mortgage rates. He explained that while there may be a brief slowdown in the competitive rate reductions seen in recent weeks, this is likely to be temporary and not indicative of a long-term shift.

Mendes’ comments highlight that borrowers should not expect a reversal in mortgage rate trends, despite the potential for a short-term lull. The medium-term outlook remains positive for those hoping to secure better rates in the coming months.

Mortgage rates generally increase when the base rate rises and decrease when it falls. However, lenders tend to base their pricing on the expected long-term direction of interest rates rather than individual decisions. Because of this, today’s base rate hold is unlikely to lead to significant changes in mortgage pricing.

Though the base rate has been held at 5 per cent today, forecasts suggest it could fall to 4.75 per cent by the end of the year and continue to decrease, reaching around 4 per cent by the end of 2025. It may eventually settle at about 3.5 per cent. Some analysts, like those at Capital Economics, predict the rate could even drop to 3 per cent by the end of 2025.

These expected future cuts are already factored into current fixed-rate mortgage pricing. If the base rate remains steady beyond this year or inflation rises significantly, mortgage rates could start to be affected, as it would signal a shift in the anticipated trajectory.

What are today’s mortgage rates?  

According to Moneyfacts, the average two-year fixed mortgage rate is currently 5.56 per cent, while the average five-year fixed rate stands at 5.2 per cent. This marks a notable improvement compared to last year when the two-year fixed rate was 6.58 per cent and the five-year fix was 6.07 per cent. However, today’s rates remain much higher than in 2020-21 when average rates were often below 3 percent.

Borrowers who shop around may be able to secure lower rates, particularly if they have a strong credit history and substantial equity in their property. The best two-year fixed rates for purchases are around 3.99 per cent, and for remortgages, they are about 4.14 percent. For five-year fixes, the best rates are approximately 3.77 per cent for purchases and 3.88 per cent for remortgages.

David Hollingworth, associate director at L&C Mortgages, noted that inflation holding steady at 2.2 per cent, in line with forecasts, should not cause any disruptions to the mortgage market. He highlighted that competition among lenders remains intense, with lenders frequently repricing their products to stay competitive.

For most borrowers, base rate changes won’t have an immediate effect since they are on fixed-rate deals, which don’t change until the fixed term ends. However, those on tracker mortgages, which follow the Bank of England’s base rate plus a set percentage, may be disappointed by the decision not to cut the base rate. Similarly, borrowers on variable rates, such as discount rates or standard variable rates (SVRs), could have seen benefits from a rate cut, as these rates tend to fluctuate with base rate changes.

What next for mortgage rates?

Swap rates reflect market expectations for future interest rates. Essentially, a swap is a deal where two banks agree to exchange fixed interest payments for variable ones, based on an agreed price.

These rates are shaped by factors like long-term predictions for the Bank of England’s base rate, the state of the wider economy, as well as internal goals and competitor strategies within the banking sector.

Currently, swap rates indicate a gradual decline in interest rates over the next few years. Five-year swaps are around 3.4 per cent, and two-year swaps sit at 3.7 per cent—both significantly lower than the present base rate.

Around this time last year, five-year swaps were close to 5 per cent, and two-year swaps were above 5.5 per cent. While a return to the low rates of 2021 is unlikely, there is still some room for rates to decrease further.

What does this mean for savers? 

The base rate directly impacts the interest savers can earn on their money. Typically, savings rates go up when the base rate rises and decrease when it falls.

Over the past month, savings rates have been dropping as providers adjust their deals following last month’s interest rate cut. However, it often takes a few weeks for these changes to take effect.

With the base rate now held at 5 per cent, it’s unlikely that savers will continue to see top-tier savings rates offering above 5 per cent, which were available as recently as last month.

What next for savings rates? 

There are two more base rate meetings this year, and experts predict the base rate will drop to 4.75 per cent by year-end.

Savings rates have been declining throughout the year, and experts suggest this trend will worsen in the next six months. Back in June, 25 one-year fixed-rate bonds offered over 5 per cent—now, there are none. Easy-access accounts have also seen a similar drop, with none offering over 5 per cent today compared to 15 six months ago.

Andrew Hagger, director at Money Comms, noted that easy-access accounts typically adjust to base rate changes, but some providers may absorb part of the rate reduction to stay competitive. Fixed-rate products have already factored in future rate cuts, but they too are expected to decline further.

Many experts expect at least one more rate cut from the Bank of England before the end of 2024, meaning savers can expect rates to continue dropping. Hagger advises those considering a switch to a better fixed-rate bond to act soon, while Rachel Springall from Moneyfacts Compare warns that further base rate cuts are likely before year-end, meaning savers should brace for more reductions in interest rates.

Which banks offer the best savings rates? 

According to Moneyfacts, the average easy-access savings rate is currently 3.07 per cent, and the average one-year fixed rate is 4.38 per cent. Both rates have decreased over the past month but remain higher compared to a year ago.

Since August 2024, the average easy-access rate has dropped from 3.15 per cent, while the average easy-access ISA rate has fallen from 3.36 per cent. Savers willing to shop around can find rates higher than these averages. The best easy-access accounts, with no restrictions, offer around 4.9 per cent. If your current rate is significantly lower, it may be worth switching to a provider with better rates.

Oxbury Bank is currently offering a top easy-access rate of 4.87 per cent, with a minimum deposit of £25,000. For a £20,000 deposit, this would result in £1,245 in interest over a year.

For those who don’t need immediate access to their funds, fixed-rate savings might be a better option. The best one-year fixed-rate is offered by Union Bank of India, providing 4.95 per cent interest. A £10,000 deposit in this account would yield £507 in interest over one year, with full Financial Services Compensation Scheme (FSCS) protection up to £85,000 per person.

Other competitive one-year accounts include Kent Reliance at 4.81 per cent, and Access Bank and Stream Bank at 4.8 per cent, all of which offer FSCS protection.

Savers should also consider using a cash ISA to avoid paying tax on the interest earned. With interest rates higher and the personal savings allowance set at £1,000 for basic rate taxpayers and £500 for higher rate taxpayers, it’s easier to exceed these limits. Those in the highest tax bracket receive no personal savings allowance.

For easy-access cash ISAs, Trading 212 offers a flexible ISA with a rate of 5.1 per cent. The top one-year fixed-rate cash ISA is paying 4.67 per cent, and the best two-year fixed-rate cash ISA offers 4.4 per cent.

Download NOW 

4 Simple Steps To Becoming Wealthy Through Property

DOWNLOAD