Base rates held at 5% by Bank of England
The Bank of England recently maintained the base rate at 5%, following a slight drop from 5.25% last month. This comes after the base rate had remained steady at 5.25% for 11 months, marking a significant increase from its pandemic low of 0.1% in November 2021. The rise in rates was necessary to combat soaring inflation, which reached a peak of 10% in early 2023 but has since fallen to 2.2%, just above the government’s target of 2%.
The decision to hold the base rate at 5% is positive news for businesses and households, as it signals that borrowing costs are unlikely to rise further. Looking ahead, economists predict that the base rate could fall to 4% by the end of 2025, offering more relief to borrowers.
It’s important to note that mortgage costs are not directly set by the Bank of England’s base rate. Lenders secure financing for fixed-rate mortgages from the money markets, where the cost of borrowing is influenced by the expected direction of base rates. Currently, swap rates—used by banks to borrow money—are falling. For instance, two-year swap rates have dropped from 4.3% to 4%, and five-year rates have decreased from 3.9% to 3.7%.
As a result, fixed mortgage rates are improving. The average rate for a five-year fixed mortgage with a 75% loan-to-value (LTV) has fallen to 4.3%, the lowest in two years. Forecasts suggest mortgage rates could continue to drop, with some experts expecting rates as low as 4% by 2025.
While mortgage rates are falling, affordability stress tests remain high. Reducing these from 8% to 6% could further ease the burden on buyers, helping more people enter the housing market.
“There is a mix of hope and expectation that average mortgage rates starting with a 3 will become the norm at some point soon, supporting those refinancing and breathing more life into the sales market by supporting home buyers,” Zoopla Director of Research and Insight, Richard Donnell. “The underlying cost of finance for fixed rate loans has fallen in recent months as expectations for base rate cuts ebb and flow.”
