Interest rates held at 5.25% by Bank of England: how it may impact mortgage and savings rates

There appears to be a growing appetite for a base rate cut after UK inflation fell to 2% in May.

Two members of the BoE's Monetary Policy Committee voted for a 0.25 percentage point cut to 5%, while the remaining seven members voted to keep the base rate unchanged.

Since December 2021, the BoE has hiked the base rate 14 times to combat high inflation, which has been falling.

In May, inflation was 2%, against expectations of between 1.9% and 2.1% by experts.

Over in the US, inflation rose more than anticipated earlier this year, potentially impacting UK interest rates as the BoE considers US inflation when deciding to cut the base rate.

However, the latest US data is more promising, as inflation fell to 3.3% in May.

There has been much debate over when the BoE should cut the base rate as inflation has been falling.

Currently, many experts anticipate a base rate cut from August.

How will mortgage rates be affected?

Variable-rate mortgage holders will be relieved, as a rise in the base rate usually leads to higher rates.

While mortgage rates initially fell at the end of 2023, they recently rose again after US inflation increased more than anticipated, pushing back BoE base rate cut expectations.

However, the latest US data is more promising, as inflation fell to 3.3% in May.

The current average five-year fixed-rate mortgage rate is currently 5.03%, according to Rightmove.

While rates may fall later this year, it will depend on many factors, such as inflation and swap rates.

If you’re looking to get on the property ladder, it’s now more expensive to buy your own home and prices are expected to rise this year if mortgage rates ease.

If you’re applying for a mortgage soon, make sure you can afford it, have a good credit score, and clear any outstanding debt beforehand.

A mortgage broker can boost your chances of a successful mortgage application. Click below to find a regulated broker via Unbiased.

How will savings rates be affected?

One of the few groups that benefit from higher interest rates is savers.

Savings rates recently peaked and are now on a downward trajectory. Those who have already locked in their rates can enjoy higher returns as rates fall.

While you can beat inflation (2%) with an easy access or fixed-rate account offering around 5.5%, those looking for higher rates may want to consider investing.

If you are considering a fixed-rate account, you should open one now before savings rates fall further.

If you have long-term financial goals and don’t need immediate access to your cash, investing is an option.

While your investments can rise and fall in value, you may be able to ride out any potential volatility by investing for a few years.

You can quickly connect with a financial adviser via Unbiased, who can help you with an investment strategy or review your existing portfolio.

What about annuities?

Annuity rates have soared by 23% over two years, driven by several interest rate hikes.

Annuities offer a fixed income for your retirement or a fixed period to provide peace of mind.

However, as a base rate cut is anticipated soon, it’s worth finding an annuity with the best rates now, as these may fall alongside interest rates.

You can quickly connect with a qualified financial adviser via Unbiased, who can help you find the best annuity for your circumstances.