The Bank of England will periodically make decisions regarding the base interest rate. These decisions take place at Monetary Policy Committee (MPC) meetings, usually eight times per year. This has a knock-on impact on many aspects of financial life, including mortgages and savings. In May 2025, the Bank of England cut the base interest rate* from 4.5% to 4.25%. This was the fourth cut in the interest rate since August 2024. A cut in the base interest rate can be good news for borrowers, for example those with a mortgage. Conversely, lower interest rates are not favourable for savers.
In this article, we’ll discuss what lower base interest rates mean for different mortgage types, and what this could mean for you.
Why does the Bank of England change the base interest rate?
The Bank of England raise or cut the base interest rate in order to manage economic conditions. If inflation is high, the base interest rate may be raised. This will encourage people to save disposable income rather than spending it. Demand for products therefore decreases, often leading to prices being lowered. With lower prices, the rate of inflation will fall.
If the wider economy needs a boost, the Bank of England may cut the base interest rate in order to encourage spending. Where interest rates are lower there is not as much incentive to save. Individuals are more likely to spend, leading to a growing economy.
How the Bank of England base interest rate impacts different mortgage types
The impact the Bank of England base interest rate has on your mortgage largely depends on your mortgage type.
Those with a fixed rate mortgage deal are fixed into their mortgage rate for the duration of their deal. This is usually two or five years. The majority of mortgages in the UK are on fixed rate deals. This mortgage type is unaffected by changes to the base interest rate throughout the duration the deal. Borrowers with a fixed rate deal will continue to pay the same amount each month. However base interest rate changes give a good indicator of the sorts of rates that may be available at the end of your current deal. If it is looking favourable, individuals are able to lock in a new rate prior to the existing rate finishing. This may be up to 6 months before the end of your existing rate.
If your current mortgage deal has a variable rate, the interest rate may vary throughout the deal. Whilst variable rate mortgages don’t precisely track the base interest rate, they often move up or down in alignment. Lenders can choose if to pass the interest rate rise or drop on to borrowers. Whilst it’s common for them to, there may be a time lag, so borrowers may not benefit immediately. As the mortgage rates rise and fall, so will the monthly payments required.
Tracker mortgages are a form of variable rate mortgage. This is the mortgage type that will be most impacted by changes to the base interest rate. The mortgage rates track the base interest rate exactly, plus a percentage. For example if the base interest rate is 4.25% and it tracks at the base rate plus 0.5%, the mortgage rate will be 4.75%. This flexible mortgage type often comes with no early repayment charge. They can be popular with those who may be able to pay their mortgage off early. Due to mortgage rates taking market predictions in to account, tracker mortgages may have a higher rate than fixed rate mortgages in the short-term. However if economist predictions for the base interest rate come to fruition, this could change. Keep reading for more about this.
Mortgage landscape in the UK (as of May 2025)
Due to widespread economist predictions that the base interest rate will continue to fall through the year, lenders are already reflecting this in their mortgage rates. This is known as the swap rate. The rates given are based on what experts forecast the base interest rates will be in the future. The purpose of this is to minimise the risk to lenders, so they are not offering fixed mortgage rates below what the base interest rate is expected to be.
It is for this reason that many fixed rate mortgage deals in the UK currently already reflect the drop in base interest rate. In fact, almost all major UK lenders have fixed rate mortgage deals available with a rate of less than 4%. Whilst this is below the new Bank of England base interest rate, it is expected to drop further in coming months. It should be remembered, though, eligibility for such rates is not a guarantee. Some may require a higher level of deposit on a property, others may have higher fees than other options. The right mortgage rate deal for you should be based on your own financial circumstances, not just on the interest rate alone.
How Bell Mortgage Solutions can help
It’s important to remember that predictions are not fact. In this instance they are insights made by experts, but in this time of global economic uncertainty, the situation could change in an instance. An example of this is the fall of stock markets across the world following the announcement of import tariffs by the US government. The UK economy has shown signs of recovery from this happening, however the long-term implications are still to be seen. Whilst current predictions are that the Bank of England will lower the base interest rate further, they may decide to hold it at its current rate for a period. This would have an impact on lenders who have set competitive mortgage rates based on the predictions.
Working with a mortgage broker such as Bell Mortgage Solutions can help you find the best mortgage deal for your individual needs and circumstances. We will take into account your financial situation, as well as your priorities. If it is more important to you to know your outgoings each month in order to budget effectively, a fixed rate mortgage may be preferable to you. If flexibility is important, a tracker mortgage may be more suitable. We will advise on the best course of action for you and your needs.
Contact our team now to discuss your requirements.
Please note: Your home may be repossessed if you do not keep up repayments on your mortgage.
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The information contained within was correct at the time of publication but is subject to change.
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