Interest rates cut to 4.75%: what could potentially happen with mortgage and savings rates?

The Bank of England (BoE) has cut interest rates from 5% to 4.75% today, Thursday 7 August.

Eight members of the BoE's Monetary Policy Committee voted for a 0.25 percentage point cut to 4.75%, while one member voted to keep the base rate unchanged.

In September, UK inflation fell more than expected from 2.2% to 1.7%, driven by lower air fares and petrol prices. It is the lowest inflation rate in three and a half years.

In the US, inflation is also falling, with the lowest price inflation recorded in a year (at 2.5%) in August. This also marked the slowest pace since February 2021 and potentially impacted today's BoE’s decision.

The final BoE announcement of 2024 is scheduled for 19 December, meaning there could be further cuts to the base rate before the year ends.

How will mortgage rates be affected?

The news will be a relief for variable-rate mortgage holders as a lower base rate tends to lead to their rate falling, so their monthly repayments may be lower.

The average five-year fixed-rate mortgage rate is currently 4.7%, according to Rightmove.

Fixed mortgage rates have risen or been withdrawn following the Autumn Budget on 30 October, as the cost of government borrowing has increased – and rates could remain higher for longer.

This is a blow for struggling aspiring and existing homeowners as fixed-rate mortgage rates dipped below 4% for the first time since February.

However, it’s worth stressing that mortgage rates can fluctuate depending 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 a home, and prices are likely to rise in 2025. Demand could also surge due to the changes in stamp duty next year.

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

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?

If you’re seeking the best interest rate for your savings, now’s the time to do your research, as they may fall following the base rate cut.

Savings rates peaked around the end of 2023 and have been declining ever since, so this base rate reduction could spark further and quicker falls.

It’s a good idea to open a fixed-rate savings account while rates are still high at around 5%.

You may want to consider investing if you’re seeking even higher rates, have long-term financial goals and don’t need easy access to your cash – but this comes with extra risk.

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

You can quickly match with a financial adviser via Unbiased, who can help you with an investment strategy or review your existing portfolio, as well as advise on how to reduce your tax bill legally.

What about annuities?

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

Annuity rates have increased by 2.5% on average since the start of 2024, according to Standard Life’s annuity rate tracker.

Despite a base rate cut in August, annuity rates have only slightly decreased. Usually, any cuts are seen as having a negative impact, as the movement of the base rate is linked to annuity rates.

While annuity rates have held up so far, this cannot be guaranteed following the latest reduction, so it’s worth considering an annuity now.

Unbiased can match you with a qualified financial adviser who can help you find the best annuity for your circumstances.