Changes in interest rates don’t just shift numbers on a chart or make news headlines. They can decide your monthly mortgage payments and whether you get a good deal or not.
When rates drop, borrowing gets cheaper and mortgage payments can shrink.
However, not all mortgages react the same way. Those on fixed rates will stay the same, while variable rates will drop right away. Understanding the difference can impact your finances, so we have explained the main points below to help you get ahead.
Interest rate cuts affect a long list of areas, one being mortgages.
In general, interest rates tell Brits how much it costs to borrow and how much of a return your savings can make.
However, the interest rate also directly impacts mortgages as it influences borrowing costs and monthly repayments.
If the interest rate drops, mortgage rates tend to follow and therefore, home loans and payments can become more affordable – depending on the type of mortgage and your personal finance situation.
The interest rate drops are not random.
The Bank of England changes rates due to economic factors such as the pace of economic growth, inflation and levels of financial uncertainty (e.g., market trends and government policies).
As of February 2025, the interest rate was lowered from 4.75% to 4.5%, as the Bank of England wants to stimulate economic growth and manage inflation.
When it comes to interest rates and mortgages, the impact ultimately depends on the type of mortgage you hold.
Let’s take a quick look at the possible options below.
For fixed-rate mortgages, an interest rate drop has no immediate effect.
This is because fixed-rate payments remain the same for the agreed period rather than changing with any movement in the Bank of England rate.
However, once your fixed term ends, you may benefit from refinancing to a lower rate in line with the interest rate drop. This will reduce your monthly repayments and you will again be able to lock in the deal for another fixed term.
Variable mortgages see a more immediate benefit as monthly payments decrease in line with the interest rate drop – leading to more disposable income every month and the potential for long-term savings.
So, when the interest rate is lowered, borrowers with a variable rate mortgage benefit first.
Looking for a mortgage? Choosing between a fixed and variable mortgage depends on your risk tolerance and financial goals.
Don’t assume that variable is always better just because, currently, these mortgages are the first to benefit from an interest rate cut. Things can change and when the interest rate goes up again, they will also be the first to have higher monthly payments. However, this could be a good deal, if you are comfortable with these fluctuations and potentially higher payments.
Fixed-rate mortgages are a better option if you want stable payments and a predictable budget, regardless of the interest rate.
Refinancing your mortgage when interest rates drop can save you money by reducing monthly payments.
Even a 0.5% or 0.25% cut can lead to steady savings over the long term, so it is worth considering if you are not planning to move soon.
However, you should also evaluate the costs, as refinancing to a fixed deal can come with fees and sometimes even early repayment charges.
Interest rates are not something to overly worry about. They do affect your mortgage rate, but knowing your options and how they work can help you make smarter financial choices.
Whether on a fixed or variable rate, keep watching the rate changes and always weigh your options carefully, especially when considering a switch.
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