Base Rate cut to 4.25%: what it could mean for UK mortgages

Adapted from a Rightmove Property News article 8 May 2025

The Bank of England has voted to reduce the Base Rate by 0.25% for the second time this year, taking it to 4.25%. Base Rate was held at 4.5% in March after it was cut by 0.25% in February.

The Bank meets every six weeks to decide what should happen to interest rates, with the aim of keeping inflation to its target and keeping the wider economy healthy. Inflation is at 2.6%, which is still above the 2% target the government sets for the Bank.

The financial markets have been widely expecting a cut to interest rates this week, as continuing to hold rates could have a negative knock-on effect on economic growth, impacting businesses and households further down the line.

What’s happened to mortgage rates recently?

Mortgage rates have continued to come down slowly in recent weeks. The average rate for a 2-year fixed rate mortgage has fallen by 0.05% to 4.64% compared to a week ago, while the average rate 5-year fixed rate is now 4.60%.

With strong signs of home-mover activity since the start of this year, the outlook for borrowers remains stable.

What does the Base Rate reduction mean for my current mortgage?

Changes to the Bank’s Base Rate can impact how much interest you’ll pay on loans, including mortgages. If you’re on a fixed-rate deal, your monthly payments won’t change until the end of your deal. And if you’re on a tracker mortgage, or a variable rate mortgage that follows Base Rate changes, this month’s Base Rate reduction will mean your monthly payments will take on this drop.

If you’re coming to the end of your fixed-rate mortgage soon, you’ve probably already started to think about the rate you’ll be offered on your next deal.

In July 2023, the Mortgage Charter was launched to help those struggling to meet their monthly payments, as well as borrowers who are coming to an end of their fixed rates soon.

The Mortgage Charter encourages lenders to be flexible and offer borrowers the chance to lock in a new deal up to six months before their current rate ends. Of course, borrowers can also look at moving to another lender – commonly known as remortgaging – but this can take longer, as you have to go through a normal lending process, such as income checks, the legal process, and maybe a valuation of your home.

This all takes time, and you would want to make sure you’re looking around a few months before the end of your current deal to avoid falling onto your lender’s Standard Variable Rate (SVR) – which will cost more than the repayments you’d have made on a fixed rate mortgage. The current average for SVRs is 7.5%.

What could the Base Rate reduction mean for affordability?

Lenders’ ‘stress test’ calculations – which is how they calculate whether someone could afford a mortgage were their repayments to jump considerably – are directly linked to the Standard Variable Rates that we just talked about above.

The ‘stressed rate’ is usually the lender’s SVR, with at least 1% added on top. So, if lenders’ SVRs reduce in line with this Base Rate cut, we might start to see affordability improve, because the stressed amount will now be lower than if Base Rate wasn’t reduced today.

What could happen next?

The Bank of England’s Monetary Policy Committee meets every six weeks to discuss and vote on whether interest rates should go up or down, or stay the same.

History has shown that after interest rates have increased over time, they have remained flat before starting to come down. So, while we’re now seeing a gradual downward curve, it’s extremely unlikely that rates will drop back to the historic lows we saw back in 2021.

The financial markets have been forecasting two-to-three more possible cuts to Base Rate in 2025. So, we could see it fall to 3.75% or further by the end of the year. Though as always, this could change depending on what happens in the broader economic environment.

The next decision on interest rates will be announced at midday on 19 June 2025.

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