Bank of England Interest Rate Cuts: What Do They Mean For Home Buyers and Owners? 

The Bank of England has announced that it is cutting interest rates by 0.25%. But what does this actually mean, and what impact will it have on you as a first time buyer or homeowner? This article explores everything you need to know:

What’s happening with interest rates?

The Bank of England has cut interest rates by 0.25%. So, interest rates currently sit at 4%. This is the lowest they have been for two years, the fifth cut since last August, and the third cut of 2025 so far. 

The Bank of England reviews their base interest rate roughly every six weeks. Depending on the current state of the economy and developments in the UK and worldwide, they choose to increase, decrease, or keep the rate the same. Loan providers then use the base rate to help them set their interest rates for borrowing products, such as mortgages. 

Interest rates rose sharply in 2022 and 2023, before the base rate stagnated at a peak of 5.25% from late 2023 to mid-2024. Since August 2024, they have been slowly dropping thanks to several decreases by the Bank of England. 

What are interest rates?

In this context, interest rates refers to the Bank of England’s Bank Rate, also commonly known as the ‘base rate’. This is the core interest rate in the UK, and the rate of interest the Bank of England pays to banks that hold money with them. Because of this, it influences everyday borrowing, lending, and saving in the UK.  

If the base rate decreases, the cost of borrowing becomes cheaper, but any savings will see a lower return. If the rate increases, borrowing becomes more expensive but you will earn more interest on your savings.  

Why do interest rates change? 

The Bank of England has a target to keep inflation in the UK at 2% or less. Inflation is the change in price of goods and services over a period of time, in this case over the year. Interest rates are put up or down to help them achieve this target. 

 This means a rise in interest rates can help keep inflation down by making it more expensive to borrow money and more lucrative to save it. So, people are less likely to spend money, demand is lower, and prices are less likely to increase. 

Then, if interest rates go down, borrowing becomes cheaper and savings see smaller returns. So, people are more likely to borrow and spend money. This can cause prices, including house prices, to rise, but stimulates the economy in other ways by getting more people spending. It’s a fine balance. 

Inflation in the UK is currently sitting at around 3.6%. This is off the 2% target, but is lower and relatively stable compared to recent years, so the Bank of England has calculated that reducing interest rates is worthwhile.  

What could the interest rate cut mean for me? 

I’m a first time buyer

Thanks to the interest rate cut, the cost of borrowing is due to go down. This means that mortgage rates will be lower, and monthly payments are likely to become cheaper. So, it will become overall more affordable to get on the property ladder.  

While an interest rate cut of 0.25% doesn’t sound like a lot, it can make a surprising difference to your monthly payments. Let’s look at an example: 

You want to buy a house that costs £250,000. You have a 10% deposit of £25,000, so you need to borrow £225,000.  

A mortgage lender offers you a 25 year term with a 5% interest rate, fixed for two years.

This means that the total amount you will repay is around £394,598 (note the 5% interest rate means that, as well as paying back the amount you have borrowed, you also need to pay back 5% of the loan amount each year). 

Your monthly payment will be around £1315. 

Now, let’s say the mortgage lender offers you the same 25 year term with a 4.75% interest rate – a 0.25% decrease. 

This time, the total amount you’ll have to repay over the term is around £284,928 and your monthly payment will be around £1282 – a decrease of around £33 per month, or £396 per year.  

Bear in mind that mortgage lenders set their own rates based on several variables, so mortgage rates offered will always be higher than the Bank of England’s base rate. 

Also bear in mind you will still need to provide your deposit, which is typically at least 10% of the purchase price, depending on the mortgage lender. This should always be considered when thinking about the affordability of buying your first home. 

I own my home with a mortgage 

If you have a fixed term mortgage, your interest rate and monthly payments will remain unchanged. A fixed term mortgage means that you will pay the same monthly payment at the same interest rate for the entirety of the fixed term, no matter whether the Bank of England’s base rate goes up or down. 

However, if your mortgage fixed term is due to end, you may be able to get a better deal on your new mortgage as rates are likely to go down. This means a lower monthly payment compared to what you may have paid before this interest rate cut. However, your monthly payments may still go up after remortgaging, depending on the rate of your current mortgage. 

As a general rule, if you remortgaged during the interest rate peak and are due to remortgage again, your interest rate and monthly payments may go down. Or, did you last remortgage before the sharp increase of rates, as many people did during the ‘cheap pandemic deals’ of 2020 with these 5-year fixed terms now coming to an end? In this case, your interest rates and payments may go up – but not as high as they may have done if you remortgaged at the peak interest rates in 2023/4. 

What about if you’re on a variable-rate mortgage (such as your lender’s standard variable rate)? Variable rate mortgages are directly influenced by interest rates and can go up or down on a monthly basis if interest rates change. So, it’s good news: due to the interest rate cut, monthly payments for variable rate mortgages will go down.  

I’m a saver

Saving for a new home, or something else? Unfortunately, the interest rate cut is not good news for savers, as it also means you’ll get a lower interest rate on your savings. This means a smaller return, so your savings will grow at a slower rate. If you use the interest on your savings to draw an income, this is likely to go down.  

It may be a good time to use your savings to make alternative investments that could offer a higher return. For example, many fixed-term savings accounts offer higher interest rates than easy access accounts, though it is harder to access the money. You should seek financial advice based on your specific situation. 

What’s likely to happen to the housing market because of the interest rate cut? 

Any cut to interest rates means borrowing becomes cheaper. This makes it more affordable to own a home. So, in theory, this can provide a boost to the housing market. It’s more affordable for first time buyers to get on the property ladder. Monthly payments for those who already have a mortgage can also go down. This may prompt more existing homeowners to upsize, freeing up more housing stock for first time buyers and others. This is good news for both buyers and sellers. 

Lower interest rates can also make the UK property market more attractive for investors and developers. For developers, financing projects becomes cheaper, which can lead to an increased supply of new homes to cater to growing demand. Investors may be more likely to invest in property, knowing they are likely to receive a higher return.  

It can also have an indirect impact. Interest rate decreases can free up more monthly disposable income for households. This can drive economic activity outside of the housing market, but a stronger economy can have a knock-on effect of boosting this area. 

However, nobody can accurately predict what will happen to the housing market – just suggest what may happen. 

Should I buy now or wait? 

A decrease in interest rates, and the resulting decrease in mortgage rates, is a good thing for buyers everywhere by making mortgages more affordable. If you are in the position to buy a home, now is probably a good time. It’s expected that interest rates will continue following the current trend and decrease again in the near future. However, house prices are rising (albeit slowly, with an increase of 1.3% over the last year) so this may balance out any further decrease in interest rates.  

In short, now is likely to be a good time to buy. Interest rates are unlikely to rapidly decrease in the near future, nor are house prices likely to sharply rise (although nobody can accurately predict what could happen). Thanks to the interest rate decrease, first time buyers are likely to be in a stronger position now than they were last month. A further decrease in interest rates may put you in a slightly stronger position later in the year, but it is unlikely to make a huge difference if you are in a position to buy now.  

However, you must always consider your personal situation and finances before making a decision, and get a mortgage in principle before viewing any homes so you know what your mortgage is likely to cost. 

Why am I being offered a mortgage interest rate that’s higher than the bank rate? 

The Bank Rate is the rate of interest paid by the Bank of England to banks that hold money with them. So, it has a lot of influence over the rates that these banks then offer their customers for borrowing, such as a mortgage. As a general rule, if the Bank Rate increases or decreases, mortgage rates follow suit. However, it’s not the only factor that influences mortgage rates.  

Lenders need to take other factors into account, like the risk of the loan not being paid back over the term. The higher they think this risk is, the higher the mortgage rate offered. Every mortgage loan comes with some risk, so it is extremely rare for mortgage rates to reflect the Bank Rate accurately.