Interest Rates Cut To 4.0%: What Does This Mean For Home Buyers?

Last week, the Bank of England cut the interest rate from 4.25% to 4.0%. The cost of borrowing is now at its lowest level for two years.

Last week, the Bank of England cut the interest rate from 4.25% to 4.0%. The cost of borrowing is now at its lowest level for two years - what does this mean for home buyers and mortgage rates?

We’ll take a look at this latest interest rate reduction and how this could affect you as a potential home buyer.

Why did the Bank of England cut the interest rate?

Before we look into mortgages, a bit of background. The base interest rate (also known as the base rate, interest rate and bank rate) is the rate that the Bank of England (BoE) charges commercial banks and lenders for loans.

This is set by the BoE Monetary Policy Committee, which meets every six weeks to recalculate. Any change in base rate has an impact on national spending behaviour, so it’s used as a tool to balance the economy by reducing or increasing spending.

This latest base rate cut, on the back of four previous cuts over the last twelve months, is a response to increasing inflation. Lower interest rates mean (broadly speaking) that people have more money to spend, which stimulates the economy.

Will the latest interest rate cut affect my mortgage?

This depends on the type of mortgage you have, and whether it’s fixed or variable. It’s good news for mortgage holders who have a standard variable rate (SVR) or tracker mortgage.

A tracker mortgage directly follows the base interest rate, so when that drops, so do the monthly payments. If you have a base rate tracker mortgage, your payments will definitely be lowered.

While SVR lenders aren’t obliged to reduce their rates when the base rate lowers, they usually do. If you have a SVR mortgage of £250,000 over 25 years, your monthly payments will fall by about £40.

Around 7.1 million of Britain’s mortgage holders have a fixed rate mortgage, and sorry, this is not affected by any changes to the base rate. If you already have a fixed rate mortgage and you’re coming to the end of your fixed term period, speak to a financial advisor before deciding what to do next.

Does the new interest rate make it easier to get a mortgage?

When the BoE reduces the base rate, it’s likely that lenders such as high street banks will also reduce their rates, including for loans like mortgages. This can make it easier to get a mortgage, and what’s more, one with a more favourable rate for the home buyer.

A mortgage calculator can give you an idea what different repayments will look like for you.

Will there be an impact on my savings?

If you’re saving for a deposit, a cut in interest rates isn’t the best news. While an interest rate reduction is beneficial for certain mortgage holders, it’s not as helpful for savers who’ll see a drop in their monthly interest payments.

Interestingly, this is one of the ways that the BoE uses the base rate to stimulate the economy. If keeping money in a savings account becomes less attractive, consumers will spend more. However, if you’re saving for a deposit, our advice is to carry on! Yes, your interest payments will be smaller, but you’re still working towards that dream home.

Will the interest rate be cut again?

It’s predicted that there will be a further cut to the interest rate this year and again in 2026. However, the latest interest rate cut was a close call, with Committee members putting the motion through to an unusual second vote (and even then, it only passed by five votes to four).

The Governor of the Bank of England, Andrew Bailey, said that any future cuts would have to be “made gradually and carefully”. The likelihood of future cuts, he told the BBC is “a bit more uncertain.” This has made forecasters a bit less confident in their predictions, and if you’re holding out for a further drop in the base rate before taking out a loan, think carefully and seek expert financial advice.

How do I make the right decision when choosing a mortgage?

At Tilia, we always recommend that our customers, especially first time buyers, engage an Independent Financial Advisor. They will take a closer look at your finances, the market and what mortgages are currently on offer, and be able to advise you on the best product for you. The interest rate cut may have less of an impact on your personal finances than the latest headlines suggest.

Take a look at our range of homes available.