Mortgage rates are expected to continue their descent after figures released on Wednesday show inflation falling, as experts predict the base rate could be cut next month.
Banks have been cutting the prices on their home loans in recent days, with Santander announcing the cheapest deal on the market – at 3.55 per cent – earlier this week.
Here’s what Wednesday’s inflation figures mean for interest rates, and what could happen to mortgage rates as a result.
Interest rate cut in December likely
Interest rates – set by the Bank of England (BoE) – tend to fall as inflation moves towards the BoE’s target level of 2 per cent.
Experts had already been predicting that the BoE could lower rates next month – from 4 per cent to 3.75 per cent – and Wednesday’s figures make this even more likely.
Following the inflation figure reveal, traders were pricing in an 80 per cent chance of a cut next month and at least one more reduction by the end of next year.
“Today’s data could have a silver lining, with market expectation that the BoE will deliver an interest rate cut before Christmas edging up,” said Danni Hewson, head of financial analysis at AJ Bell.
Sanja Raja, chief UK economist at Deutsche Bank Research, added: “With the labour market softening more than expected, GDP growth weaker than the BoE projected, and inflation tracking a little lower than expectations, we think Governor [Andrew] Bailey – who will likely have the deciding vote for December – will feel more confident about cutting BoE rates below 4 per cent.”
The major factor that could play a role in stopping a December rate cut would be next week’s Budget.
Craig Rickman, personal finance editor at interactive investor, said: “Today’s encouraging data may pave the way for an interest rate cut in December, when the BoE’s Monetary Policy Committee (MPC) unveils its final decision of 2025.
“Policymakers will inevitably keep a close eye on measures announced at the Budget with [Chancellor] Rachel Reeves set to step up to the dispatch box in a week’s time.”
What will happen to mortgage rates
If the BoE does cut interest rates by 0.25 percentage points on 18 December, some mortgage rates would drop immediately.
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Tracker mortgages – which follow the BoE base rate – would drop 0.25 percentage points, as would most variable deals – though this is at the discretion of the lender.
Fixed mortgages – the most popular type among borrowers – operate a little differently.
If you have a fixed deal, the interest rate on the deal remains the same for a set length of time – usually two or five years.
But you will be offered a new rate when your term ends and you come to renew.
Fixed rate pricing is largely based on swap rates – which follow predictions for where the BoE interest rate will go next.
Some lenders have started to cut rates in recent days, with Santander offering a two-year fixed deal for 3.55 per cent, whilst HSBC confirmed it will make reductions later this week.
Nationwide offers the next closest deal, with two-year fixes starting from 3.64 per cent with a £1,499 fee and three-year fixes at 3.75 per cent with a £999 fee.
Barclays’ cheapest five-year fix is 3.81 per cent with an £899 fee, also for borrowers with a 40 per cent deposit.
Mark Harris, chief executive of brokers SPF Private Clients, said: “With activity in the housing market subdued as buyers and sellers wait to see what the Budget holds, lenders are launching some really competitive sub-4 per cent mortgage rates in an effort to boost business before the end of the year.”
Experts say that these reductions could continue now that inflation has dropped, which has further increased expectations of a December cut.
David Hollingworth, associate director at L&C Mortgages, said: “The continued downward path for inflation is significant for mortgage borrowers. It’s likely to underline the market’s expectation of a base rate cut in December.
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“The growing belief of a cut coming sooner than previously anticipated has already seen mortgage rates improving. Mortgage lenders have been quick to pass on the improved cost of funds and there’s been successive rounds of fixed rate cuts by most major lenders.
“Today’s figures shouldn’t derail those improvements, and we could see more lenders edging their rates down.”
However, the best mortgage rates are still mostly held for those with the highest deposits or equity.
The average two-year fixed rate is 4.88 per cent, according to Moneyfacts, whilst the average five-year is 4.93 per cent.
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