Interest rates held at 4.75%

Interest rates have been held at 4.75% after inflation starts to tick up again.

The Bank of England’s monetary policy committee has decided against further cuts to interest rates after inflation rose to 2.6% in the year to November, up from 2.3% the previous month. The increase moved inflation further away from the Bank of England’s target of 2%.

The hold on interest rates is not the Christmas present the 1.8 million UK homeowners with fixed rate mortgage deals due to expire in 2025 were hoping for. Many will find their new mortgage payments significantly higher (some between 50-70% more) than when they locked into their current deals 2-3 years ago.

At the start of 2024, there was optimism that the worst of living pressures were behind us, and interest would start to fall. But this hasn’t been the case. In the end, the Bank of England has made just two cuts the last one being in November with interest rates reducing from 5% to 4.75%.

Should we be more optimistic about 2025?

Despite inflation creeping up slightly Andrew Bailey, Governor of the Bank of England, told the Financial Times that policymakers could cut the base rate four times in 2025.

This has led several economists to predict interest rates may fall to 4% by this time next year. But that remains higher than previous expectations of 3.5%.

What are interest rates and why do they change?

Interest rates dictate how much it costs you to borrow money and the reward you’ll get for saving it.

The Bank of England's base rate is the rate it charges other lenders to borrow money. This rate then influences:

• the cost of loans, such as mortgages
• the interest rate paid on savings accounts

The Bank adjusts rates to control inflation, which is the rise in how much things cost over time. Here’s how it works:

• When inflation is high, the Bank may raise rates to bring it back down towards its 2% target.
• The idea is to encourage people to spend less and reduce demand.
• Once inflation is at or near the target, the Bank may hold rates steady or even cut them.

How do interest rates affect my mortgage?

Around a third of households in the UK have a mortgage, according to the government’s English Housing Survey.

Roughly half of Britain’s 11 million mortgage borrowers are on fixed-rate deals. This means their mortgage payments aren’t immediately affected if interest rates move up or down. However, with mortgage rates much higher than they have been for most of the past decade, many could find themselves paying much more when they come to remortgage at the end of their current deal.

Homeowners with tracker or variable rate mortgages are directly affected by changes to the interest rate, as their payments are linked to the Bank of England base rate. If the rate increases, their payment will go up and if it decreases, the amount they are charged each month will fall.

How do interest rates affect savers?

When interest rates are higher, savers receive a larger return on their savings. When it’s lower, they earn less.

When the Bank of England base rate increases, the interest paid on savings typically increases as well. But this isn’t always the case. The base rate is only a guide for banks – it is up to them whether they choose to pass those changes onto savers. 

What can I do if I’m struggling with my mortgage payments?

Mortgage arrears are a priority debt. This means you need to pay them before debts like credit cards.

If you’re in arrears (debt) with your mortgage payments, don’t wait for your lender to contact you.

They’ll normally write to you within 15 days of a missed payment, but you should talk to them as soon as possible.

Under the Mortgage Charter agreed between the government, FCA and major mortgage lenders, you could be offered to:

• Switch to interest only-payments for six months without it affecting your credit score
• Extend your mortgage term without affordability checks
• Take a payment holiday without it affecting your credit score

Lenders can take you to court to repossess your home if you can’t agree a way to pay back the money you owe. But this is a measure of last resort, and they’d rather work with you to reach an agreement.

If you’re struggling with arrears, we can help. We can work with you to find a debt solution that best meets your individual circumstances. Get in touch if you’d like to discuss what support is available to you.