Base rate cut expected to ease funding costs, but competition and criteria could matter more than headline rates
The Bank of England’s decision to lower the Bank Rate by 0.25 percentage points to 3.75% is expected to bring further, but measured, reductions in mortgage costs, with fixed-rate pricing and high loan-to-value lending set to benefit most over the next two years.
According to Ray Boulger (pictured top left), senior mortgage technical manager at London broker John Charcol, while the announcement of the Bank Rate cut was obviously the headline news, it would be “just as important to digest the accompanying statement, which should give some clues on the scale and speed of further cuts.”
For lenders and intermediaries, the key impact lies in how the Monetary Policy Committee (MPC) frames the path ahead. The tone of the Bank’s statement on inflation and growth will influence swap rates, determining how far lenders can push down two-, three- and five-year fixed mortgage rates.
Boulger highlighted that market understanding of the MPC process is often incomplete. “The general perception from the way it is reported is that the MPC makes its Bank Rate decision on the Thursday morning of the announcement, but in fact it meets the previous day, which allows time for a comprehensive report of the meeting to be prepared for release with the Bank Rate decision,” he pointed out.
How far can mortgage rates fall?
With the first rate cut since the summer confirmed today, market expectations now focus on the likely floor for Bank Rate and what that implies for mortgage pricing.
“A fairly consistent view of economists, which I share, is that Bank Rate will bottom out at between 3% and 3.25%, with at least two cuts of 0.25% in 2026,” Boulger said.
That outlook suggests funding costs have already adjusted to much of the expected easing cycle. In the short-term fixed market, current pricing shows that sentiment.
“With two-year fixed mortgage rates already starting at nearly 0.5% below Bank Rate, the market is already discounting a lower Bank Rate and when the majority view is that rates are on or near the floor we can expect even the cheapest fixed rates to be above Bank Rate, except perhaps if a short term rate is subsidised by a large fee,” Boulger explained.
“Therefore, although mortgage rates will fall further in 2026, market leading two-, three- and five-year rates will fall less than Bank Rate. How far longer term fixed rates will fall is less obvious, as this will be influenced more by changes in inflation expectations.”
That backdrop is also reshaping the balance between fixed and variable options. David Hollingworth (pictured top right), associate director at fee-free mortgage broker L&C Mortgages, noted that tracker products are starting to attract more attention as borrowers weigh up the prospect of additional cuts.
“Tracker rates have been gradually closing the gap on fixed rate options but are still behind the best of the fixes.” Hollingworth said. “However, with more base rate cuts expected next year, we will potentially see more borrowers wondering if following rates down could make for a better option in the longer run.
“Trackers are also more likely to be free of any early repayment charge which gives added flexibility. However, there’s no guarantees that rates will continue to drop and so borrowers need to have some ability to cope with rising payments if rates take a turn.”
For brokers, this points to a period in which further cuts to Bank Rate deliver incremental, rather than dramatic, reductions in the sharpest fixed-rate deals, and where product selection between fixed and tracker becomes more nuanced. Product design, incentives and criteria may become as important as headline rates when advising clients.
House prices, inflation and borrower affordability
The interaction between rate cuts, house prices and inflation is central to the medium-term outlook for mortgage demand.
“With only a small rise in house prices in 2025, probably around 1.5% depending on which index one favours, and falls for some areas and some property types, specifically flats, real house prices fell, with inflation at a little over 3%,” Boulger said.
He pointed to labour market trends and wage policy as key drivers of future affordability. “Although the increasing unemployment rate and reduced number of vacancies will reduce pressure on wage increases, next year’s increase in the various minimum wages will have the opposite effect,” the industry veteran said.
“The increase in the National Living Wage for those aged at least 21 is 4.1% but the increase is significantly more for younger workers and the increase in the Real Living Wage, which many employers support, is 6.75%. This will be particularly relevant for service sector inflation.”
Despite this, Boulger expects many lower-paid workers to see gains in real income as inflation falls and rates trend down. “Despite fiscal drag, and with falling inflation, most workers at the lower end of the salary scale can therefore expect a real terms increase in income,” he said.
“Couple this with expected lower mortgage rates, plus improved lender affordability and other criteria, which has further to go next year, and an increase in house prices in excess of inflation, say around 4%, looks likely in 2026.”
Fixed-rate competition intensifies
Alongside the gradual shift in expectations around variable rates, Hollingworth said fixed-rate pricing has already moved significantly in borrowers’ favour and is likely to remain a key part of the conversation in 2025.
“Fixed rates have improved substantially and improved the choices for those still edging toward the end of an ultra low five-year fixed rate,” he said. “Lenders are competing hard and there could be more scope for lenders to improve their rates in the new year when they will want to get off to a good start.”
He added that, even with the recent rally in fixed pricing, market expectations still leave room for further gradual improvements. “Although rates are already pricing in further rate cuts next year, there’s still scope for market expectation to see rates drift down further,” Hollingworth stated. “Borrowers are therefore even more likely to need advice to help them find the right option and keep track of a fast moving market.”
First-time buyers and high LTV products to gain
According to Boulger, the rate cut, alongside gradual easing in underwriting standards and more competition at higher LTVs, is expected to favour first-time buyers in particular. “The proportion of purchases by FTBs is likely to increase, as the recent criteria improvements will be particularly helpful to that cohort, with much greater availability of high LTV mortgages,” he said.
“In particular, the new build sector should benefit with more lenders now offering up to 95% LTV on new builds, including flats in some cases, and even 100% available from Skipton with its Track Record mortgage.”
For the mortgage market, the message from the Bank of England’s latest interest rate move is that while the era of steep rate rises has clearly ended, the remaining downward journey in mortgage pricing is likely to be steady rather than steep, with product innovation and criteria changes playing an increasing role in client outcomes.
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