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Bank Rate holds at 5.25%, so when will rates drop?

The Bank Rate holds at 5.25%, despite inflation hitting its 2% target for the first time in 3 years.

Words by: Nic Hopkirk

Senior Editor

Bank rate holds at 5.25%

The Bank of England has kept the Bank Rate at 5.25% for the seventh time in a row.

The Bank has held rates at 5.25% in an effort to combat inflation, leading to higher mortgage repayments but also higher savings rates.

The Bank Rate, sometimes known as the 'base rate’ or ‘interest rates’, affects the rates that lenders charge their borrowers.

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Inflation hits 2% target for first time in three years

Inflation slowed to 2% in the 12 months to May, hitting the Bank of England’s target for the first time in almost three years, according to data released by the Office for National Statistics on 19 June. 

With rising prices coming back under control, all eyes had been on the Bank to see if the news might mean a cut in the interest rate, which has been frozen at a 16-year high of 5.25% since August 2023.

However, uncertainty over whether cuts would come had led to a rise in mortgage rates in recent months, with average rates on two- and five-year fixed rate deals creeping up since February, according to Moneyfacts.

The average two-year fixed rate now stands at 5.93%, while the average five-year fixed rate stands at 5.50%.

John Fraser-Tucker, Head of Mortgages at online mortgage broker Mojo Mortgages said: “Naturally, the BoE tends to stay neutral during a General Election, so making a rate change weeks before voters head to the polls could be seen as influencing voters.

“Moreover, the housing policies of the elected government are likely to impact the outlook for the base rate going forward. 

“Labour’s manifesto seems to focus more so on first-time buyers as they’ve stated that they’ll make the existing mortgage guarantee scheme permanent under the name 'Freedom to Buy'. Comparatively, the Conservatives have focused on policies that they believe will bring down mortgage costs.

“Given the contrasting focuses, it makes sense for the BoE to wait and see which government is elected before lowering the base rate, otherwise it could add more uncertainty to the mortgage market right now.” 

Choice of mortgages available increases to highest level since 2008

Meanwhile in good news for borrowers, the choice of mortgages available has increased, with borrowers now having 6,629 mortgage deals to choose from, the largest number available since February 2008, according to Moneyfacts.

However, buyers will need to act quickly to secure the best deals, as the average shelf life of a product has reduced from 28 days at the start of May to just 15 in June.

What does the news mean for existing borrowers?

Borrowers on variable or tracker mortgages will be relieved that their rate is unlikely to go up. Though they’ll be disappointed the Bank Rate wasn’t cut. 

According to the HomeOwners Alliance, the average standard variable rate (SVR) now stands at 8.18%, down from 8.19% last November. The rate has stayed at this level since the start of April.

Meanwhile, borrowers locked into fixed-rate mortgages will not be impacted - yet. But borrowers who are due to come off fixed-rate deals and remortgage soon are likely to see their mortgage repayments jump, squeezing household budgets further.

Annual mortgage repayments for the average buyer are now a staggering 61% higher than they were three years ago, before mortgage rates started climbing.

It means that in pure monetary terms, they have soared from £7,100 to £11,400. Two thirds of that hike is fuelled by higher mortgage rates, while one third is due to higher house prices, our research shows.

First-time buyers are finding it tricky to afford mortgage repayments in the first place. Because of recent interest rate rises, mortgage affordability is now the biggest challenge for first-time buyers, according to the Building Societies Association (BSA)

What is the forecast for interest rates? 

The Bank is generally expected to cut interest rates this year (assuming there are no surprises in store). But opinions on when exactly this could happen, and by how much, naturally vary.

Some economists believe the rate will be cut in August, while others are suggesting it may be as late as September.

As a general rule: if interest rates fall, the mortgage rate forecast would be for mortgage rates to fall too. But time will tell if this happens.

Our Executive Director of Research, Richard Donnell, believes that even if inflation and interest rates edge down, mortgage rates are unlikely to drop much further this year.

Donnell explains: “Lower interest rates would likely result in further modest declines in mortgage rates but how far depends on how low money markets see base rates falling.

“Economists currently expect base rates to fall to 3.5% by the end of 2025, which would imply mortgage rates remaining in and around the 4%+ range.”

We try to make sure that the information here is accurate at the time of publishing. But the property market moves fast and some information may now be out of date. Zoopla Property Group accepts no responsibility or liability for any decisions you make based on the information provided.