The Bank of England has cut the Base Rate to 3.75%, crossing below the psychologically significant 4% threshold for the first time since early 2023. It marks the fourth cut this year and brings borrowing costs to their lowest level in nearly three years, a significant retreat from the 5.25% peak reached in August 2023.
But the narrow 5-4 vote that delivered it tells you everything about what comes next: future cuts will be harder fought, and the pace of change is slowing.
Governor Andrew Bailey needed to switch his vote from November’s hold to support this reduction, and his message was clear.
“We still think rates are on a gradual path downward, but with every cut we make, how much further we go becomes a closer call.”
Why Now?
The decision reflects improving economic conditions. Inflation has dropped to 3.2% in the year to November, down from 3.6% in October and now at its lowest level since March. Bailey said we had “passed the peak of inflation,” and crucially, the Bank now believes the headline rate will be “closer to target by April, rather than 2027”, a significant acceleration in their timeline.
The labour market is also softening. UK unemployment rose to 5.1% in the three months to October, up from 4.3% a year ago, the highest level since January 2021. That easing pressure gives the Bank more room to cut, though they’re clearly moving cautiously.
Markets have responded by scaling back expectations for 2026, pricing in just one further quarter-point cut, and not until June.
What This Means for Mortgage Costs
The good news is that mortgage rates have been falling steadily throughout 2025, and they’re now meaningfully cheaper than at the start of the year. Two-year fixed rates have dropped from 5.06% to 4.31%, and five-year fixes from 4.82% to 4.39%.
More significantly, two-year fixes are now cheaper on average than five-year deals, a reversal of the pattern we’ve seen for the past few years. Back in August 2023, two-year rates were almost 0.5% more expensive than five-year fixes because markets expected rates to fall sharply, making longer fixes safer for lenders. Now that future cuts look less certain, two-year deals have become the better value option for many borrowers.
A typical borrower taking out a fixed rate mortgage today compared to the start of 2025 will save around £25 per month (£300 per year) for every £100,000 borrowed over 25 years. If rates continue falling as expected and the average mortgage rate reaches 4.3% during 2026, those savings could increase to £38 per month (£456 per year) per £100,000 borrowed.
The Reality Check
Here’s the important context: whilst mortgage rates are falling, they’re not falling as quickly as the Base Rate itself, which has dropped a full percentage point over the past 12 months. Average mortgage rates have historically tracked around 0.8 percentage points above the Base Rate, which suggests we’re heading towards a world of 4% to 4.5% mortgages in a 3% to 3.5% Base Rate environment.
That’s meaningfully lower than today, but it’s still substantially higher than the ultra-cheap borrowing many households became accustomed to during the 2010s and throughout the pandemic. The days of sub-2% mortgage rates aren’t coming back.
The Big Challenge for 2026
Around 1.8 million fixed rate mortgages are due to expire next year, according to UK Finance. Many were taken out at historically low rates, and as these borrowers refinance onto significantly higher rates, the adjustment will continue to ripple through household finances. The rate-cutting cycle may be helping, but it’s not eliminating the payment shock facing those coming off deals struck in 2020 or 2021.
Planning Your Next Move?
Whether you’re a first-time buyer looking to take advantage of improving mortgage rates, or you’re remortgaging and need to understand your options in this changing market, getting expert advice is more important than ever. At Alan Batt Estate Agents, we don’t just help you find the right property—we can connect you with trusted mortgage advisors who can guide you through the current landscape and secure the best deal for your circumstances.
With over 40 years of experience in the local property market, we understand how interest rate movements affect buyers and homeowners across the region. Get in touch with our team to discuss your property plans.