Firstly, what is the base rate? Commonly also known as “the Bank Rate” in the UK, this is simply the rate at which the Bank of England (BOE) lends money to other banks and financial institutions, such as those seen on our high street.
These banks then service the UK consumer with lending products such as loans, credit cards and mortgages, normally adding margins to make profit. When the base rate increases, borrowers bear the brunt through higher lending costs, whereas savers may benefit from better returns. When the base rate reduces, borrowing terms are often more favourable, but savers will likely receive less interest.
In response to the recent years’ cost of living crisis, we saw the BOE increase the base rate to levels not seen since the 2008 financial crisis. This is one tool at their disposal to try and curve inflation by encouraging people to spend less, reducing demand, and holding prices. Thankfully, in the last rolling 12 months, to fuel the economy, we have seen the BOE reduce the base rate 4 times, down from 5.25% to 4.25% as of May 2025 and remaining stable at this level as of 19th June.
Why did the base rate reduce in May?
Normally, this would be a sign of increased financial market stability and increased confidence that inflation is under control in line with the Government’s 2% target. However, we are still not quite at the target, and in fact since May, as widely predicted, inflation rates have marginally increased due to increasing costs such as labour, oil, and food. I believe one of the fundamental reasons for the decision to reduce the base rate stems from the BOE’s approach to counter punch the impact of the continued global tariff approach from the USA. With rising concerns over the knock-on effects of the costs of imports and exports, the BOE is trying to fuel consumer confidence in the UK market and reinforce the message that our market is resilient.
Regardless of the reasoning, the base rate has been reducing, and based on the conversations we have had with major lenders economists in recent weeks, it is widely tipped for the BOE’s Monetary Policy Committee (MPC) to still vote to reduce the base rate further, possibly 2-3 more times before year end. The most recent 4 reductions have all been by 0.25% at a time, and if this trend were to continue, the current base rate could reach 3.5%. Whilst it is great to see increased confidence in the market, considering recent years events, I am slightly more cautious, and feel if we do receive 2 further drops to around 3.75% this would still be a positive sign. The reason for my cautiousness, centres around how volatile the world is at present. There are continued global and domestic affairs that are impacting our market, which seemingly change on a weekly basis, making it difficult for the BOE to plan with certainty too far in advance.
What does reducing the base rate mean for our clients?
Whilst like the BOE we cannot predict the future, we can look at what reducing base rates may mean for our clients. It is also worth noting, the base rate is not the only key factor that drives the mortgage market. Other than increasing confidence in the hope of lower lending rates, in the immediate aftermath of a base rate drop, we tend to see predominantly those with mortgages on variable or tracker-based products benefitting. Clients with these types of mortgages, subject to their mortgage contract terms, will likely see an auto reduction in their interest rate often in line with the base rate % drop. However, as always with variable and tracker products, they can quite easily go up, if any negative market factors lead the BOE to suddenly decide to increase the base rate instead. For most existing residential borrowing clients who have fixed rate products (approximately 85% of the mortgage market), their rates will likely not move until they can review potentially better options at the end of their current fixed period, assuming they do not break their current product early which would likely incur a cost/ penalty to do so. With lenders rates being volatile, we are expected to see continued widespread rate movements, but this doesn’t mean necessarily downwards. We are not expecting significant rate cuts in the near term as these had already been priced in by lenders prior to the May BOE reduction.
Ensure you seek comprehensive advice from qualified professionals.
Whether you are purchasing or refinancing, finding the optimum time to enter the mortgage market can sometimes be all about timing and good fortune. Whilst the prospect of further base rate reductions will certainly be welcome news in general to those looking to borrow, our guidance as always remains the same, seek comprehensive advice from a qualified, experienced professional, like those at Capital Private Finance. They will likely be able to save you money, time, and peace of mind. Most importantly they will be able to assist in getting the transaction completed for you so you can achieve your home ownership goal – remember no one wishes to secure a mortgage, but instead what it can get you, a home. It may not always be best to delay purchasing or refinancing in the hope of further rate decreases, as these may not come within the time frame needed for your individual circumstances. Instead, based on advice, select the best option available now, and lock it in. Then utilising your adviser’s knowledge, and assuming they are proactive, they should be monitoring the rates until completion, and revise accordingly if cheaper options become available during this period, all whilst knowing your rate is secured and you are protected in case rates do unexpectedly increase.
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Author
Amit Gupta, Regional Financial Services Manager – Capital Private Finance
Capital Private Finance Limited
