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Financial markets anticipate the Bank of England will implement further interest rate cuts throughout this year. Experts predict a total of three reductions, bringing the base rate down to 3.75 percent by the close of 2025, a decrease from the current 4.5 percent. Market consensus suggests the first rate cut is highly probable at the upcoming Monetary Policy Committee meeting on May 8th. This expected monetary easing is closely watched for its potential impact on mortgage rates and the broader UK economy.
Anticipated Impact on Mortgage Rates
Typically, reductions in interest rates are followed by a decrease in mortgage rates, as borrowing costs for lenders are lowered. However, analysts suggest that significant drops in mortgage rates are unlikely in the immediate future.
Limited Rate Reduction Expected
Experts attribute this muted outlook to the fact that future interest rate cuts are already largely factored into the pricing of fixed-rate mortgages. Currently, the average five-year fixed mortgage rate stands at 5.17 percent, while the average two-year fixed rate is 5.32 percent, according to Moneyfacts data.
Peter Stimson, Head of Product at MPowered Mortgages, commented, “A base rate reduction by the Bank of England in May appears to be a near certainty. However, the same cannot be definitively said for corresponding decreases in mortgage rates.”
He added, “The rates offered by lenders to both new customers and those remortgaging are not expected to decrease substantially beyond their current levels in May.”
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Recent Mortgage Rate Adjustments
Recently, several mortgage providers, including HSBC, Santander, and Barclays, have implemented minor rate reductions. These adjustments, however, have been minimal, with decreases often being 0.1 percentage points or less for many products. For instance, Santander’s advertised two-year fixed rate for buyers with a 40 percent deposit is now 3.97 percent, following a reduction of just 0.08 percentage points.
For a £200,000 mortgage repaid over 25 years, this translates to a monthly saving of approximately £10.
Why Mortgage Rates May Not Fall Significantly
Fixed-rate mortgage pricing is primarily determined by Sonia swap rates. These rates represent the inter-bank lending rate and reflect banks’ expectations for interest rates over the two-year or five-year fixed-term period of mortgages.
Mortgage offerings to consumers are generally not priced lower than their equivalent swap rates. As of the current date, five-year swaps are at 3.75 percent, and two-year swaps stand at 3.72 percent.
While Sonia swaps have decreased from levels observed when market volatility was triggered by tariff announcements, they have remained relatively stable for some time.
On July 30th of the previous year, five-year swaps were at 3.78 percent, and two-year swaps were at 4.25 percent. This was prior to the central bank’s initial interest rate cut from 5.25 percent to 5 percent.
Since August of last year, the Bank of England has implemented three interest rate reductions. Although the base rate has decreased from 5.25 percent to 4.5 percent, five-year Sonia swaps are currently higher than they were in August and September.
Both two-year and five-year swaps have generally fluctuated around 4 percent during this period, mirroring the trend in the lowest fixed-rate mortgage deals.
According to Peter Stimson, “Mortgage lenders base their fixed-rate loan pricing on swap rates, which are a forward-looking indicator of the base rate’s trajectory, rather than the current base rate.”
He further explained, “In essence, they have already incorporated an anticipated base rate cut in May into their pricing and may have limited capacity for further rate reductions imminently.”
“Current swap rates suggest an additional two base rate cuts this year following May, and this projection is already reflected in the rates lenders are offering to new borrowers,” Stimson stated.
Babek Ismayil, CEO and founder of the home buying platform OneDome, anticipates that mortgage rates will remain largely consistent for the remainder of the year.
“Unless we observe more substantial or rapid rate cuts than currently projected, lenders are unlikely to respond with significant rate reductions, particularly if swap rates continue to rise,” Ismayil noted.
“This underscores that swap rates, rather than solely the base rate, are the primary driver of fixed mortgage costs. Currently, swap rates are indicating caution.”
“Market unease has also been amplified by volatility stemming from new tariffs and broader geopolitical tensions.”
“While certain lenders may continue to make minor pricing adjustments, mortgage rates are expected to remain relatively stable and could potentially increase if funding costs continue on an upward trend,” Ismayil cautioned.
Factors Influencing Future Mortgage Rate Trends
While the Bank of England aims to bring inflation back to its 2 percent target, it must also consider factors such as slow economic expansion and rising unemployment levels.
Currently, there is no indication of interest rates returning to the historically low levels observed before 2022.
Economists at Santander, for instance, predict that interest rates will likely remain within the 3 to 4 percent range in the foreseeable future.
However, unforeseen economic events can occur, and should a significant recession become a concern, the Bank of England might opt for more aggressive interest rate cuts than currently anticipated to stimulate the economy.
Peter Stimson suggests, “Only significant shifts in economic conditions, such as indications that the Bank of England needs to accelerate base rate cuts to bolster the economy, would prompt lenders to consider faster rate reductions.”
“For the moment, swap rates clearly point towards a total of three base rate cuts in 2025.”
“However, this outlook could be quickly disrupted by unexpected announcements from the political sphere.”
“The unpredictable nature of global events creates considerable uncertainty in financial markets.”
“Further surprises and policy shifts can be anticipated, potentially leading to a volatile trajectory for mortgage rates in 2025.”