Will The August 2025 Interest Rate Cut Affect My Mortgage?
Earlier this month, the Bank of England (BoE) cut the base interest rate from 4.25% to 4.0%. This is the fifth consecutive reduction over the last 12 months, and the cost of borrowing is now at its lowest level for two years.
What does this mean for existing and potential mortgage holders? We’ll take a closer look at how the latest interest rate reduction could affect your new home purchase or existing mortgage.
The background to the base interest rate cut
The interest rate is also known as the base interest rate, base rate, interest rate and bank rate. It’s set by the BoE and it’s the rate they charge commercial lenders (like high street banks) for loans. The rate is decided by the BoE Monetary Policy Committee, which meets every six weeks to decide what action is needed.
The BoE uses the base interest rate as a tool to affect the country’s economy, through influencing our spending behaviour. A reduced base rate can mean lower monthly mortgage payments (more about this shortly), so in theory, people have more money left over to spend elsewhere in the economy.
At the moment, we’re seeing higher inflation which affects the cost of living, hence the BoE’s decision to cut the base rate.
How the base interest rate affects our mortgages
When the BoE reduces the base interest rate, you’ll see a lot of headlines along the lines of “Great news for mortgage holders”. This depends on which type of mortgage you have, but yes, if you have a standard variable rate (SVR) or tracker mortgage, you should see a monthly saving. Here’s how different types of mortgage are affected by the base rate.
- Tracker Mortgage. This directly follows the base interest rate, so when this drops, so do your monthly mortgage repayments. If you have this type of mortgage, your payments will definitely be lowered
- SVR Mortgage. Your repayments change, but are set by the lender rather than the base interest rate. SVR lenders don’t have to reduce their rates when the bank lowers the base rate, but they usually do
- Fixed Rate Mortgage. Sorry – if you have a fixed rate mortgage, your monthly payments won’t go down. The good news is that they can’t go up either, but that’s not much comfort right now. If your fixed term period is coming to an end, seek professional financial advice before choosing your next mortgage
Buying a new home when the base rate is lower
When the BoE reduces the interest rate, lenders usually follow by reducing their borrowing rates, and this includes mortgages. This can make it easier to get a mortgage with a favourable rate. Talk to the team at Hopkins Homes about different ways to buy a new build home.
Future base interest rate cuts
Experts predict a further cut to the base interest rate later this year and again next year, reducing some monthly mortgage payments even further. However, forecasters are feeling a bit less certain after Andrew Bailey, Governor of the Bank of England, told the BBC that any future cuts would have to be “made gradually and carefully”
The course of future cuts, Mr Bailey says, is “a bit more uncertain, frankly”, and indeed, this month’s cut only passed the BoE Monetary Policy Committee vote by five votes to four. If you’re watching the base rate before making a financial decision, get expert advice.
How the base interest rate effects savings
While your mortgage interest rate goes down, so unfortunately do your savings interest payments. A lower base rate does mean that savers see a drop in their interest payments, which feels unhelpful if you’re currently saving for a deposit.
Here at Hopkins Homes, we offer a Deposit Unlock scheme, which lets both first-time buyers and existing homeowners buy their new home with a low 5% deposit. Talk to us to find out more.
Buying a new home when the interest rate is low
Buying a home is one of the biggest financial decisions you’ll ever make, and it’s important that you have expert advice. Talk to us about arranging an appointment with one of our financial advisors, who can help guide you through the current climate as well as looking at your personal finances.
While the headlines tell us it’s a good time for home buyers and mortgage holders, everyone’s circumstances are different and the financial climate can change rapidly. However, at Hopkins Homes, we have lots of different ways to buy your dream new build property, and we’re here to help you at every step of the way.