Base rate path in 2026 set to ease mortgage costs, but pressure to persist for many borrowers
A year of gradual adjustment in the UK mortgage market has left borrowers with more products to choose from and some easing in pricing. Yet households coming off ultra-low fixed rates continue to encounter tighter affordability and higher monthly costs.
Attention is now turning to what 2026 might bring. Market expectations of a Bank of England base rate of around 3.5% suggest a shift towards a more “neutral” interest rate setting. Any benefits, however, are likely to be uneven across mortgage customers.
For mortgage brokers, the key question is how lenders will price risk and capital in a lower, but not low, rate environment – and how far any cuts will translate into sustainable relief for clients with refinancing needs.
The Bank of England governor’s recent comments that any further reductions next year are “more in the balance” could encourage a cautious approach from many lenders, with funding and swap costs still sensitive to economic data and market sentiment.
Historically, average residential mortgage rates have tended to sit about 0.8 percentage points above the base rate. On that basis, a 3–3.5% base rate could imply typical mortgage rates in the region of 4–4.5%, below current levels but well above the cheapest pricing seen in the 2010s.
Illustrative figures from price comparison site Moneyfacts suggest that, if the average mortgage rate were to fall to 4.3% in 2026, a typical borrower taking out a 25-year fixed rate home loan would pay about £38 less per month – or £456 a year – for every £100,000 borrowed compared with today’s average.
“If the Bank of England base rate settles around 3.5% in 2026, as current forecasts suggest, that may represent a more ‘neutral’ interest rate environment. However, what it means for households is varied,” said Adam French (pictured right), head of news at Moneyfactscompare.co.uk.
“Mortgage borrowers may see more tangible savings, but expectations should remain measured. There are signs that uncertainty has eased since the Budget, and markets expect a further base rate cut to feed through into mortgage pricing.
“However, the outlook remains finely balanced. The effects of the budget and disinflationary pressure from China may help contain prices, but global volatility, weak growth and persistent services inflation mean the road ahead may yet have a few more bumps in store.”
For intermediaries, the projected rate path also underlines the importance of proactive refinance planning for clients with loans maturing in 2026, particularly those who fixed when rates were close to historic lows. Advisers may need to focus more on income and expenditure assessment, product transfers versus remortgages, and the potential role of longer terms or flexible structures to manage payment shocks.
“Around 1.8 million fixed-rate mortgages are due to expire in 2026 according to UK Finance, many taken out at historically low rates.” French said. “As these borrowers refinance, significantly higher repayments will follow, and the adjustment is far from over for many households.”
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