How would a cut in interest rates affect my mortgage and savings?

The Bank of England is widely expected to cut interest rates from 4% to 3.75% when policymakers meet on Thursday.

However, analysts are more divided about whether the Bank’s Monetary Policy Committee (MPC) will make further reductions.

Interest rates affect mortgage, credit card and savings rates for millions of people.

An interest rate tells you how much it costs to borrow money, or the reward for saving it.

The Bank of England’s base rate is what it charges other banks and building societies to borrow money.

That influences what they charge their own customers for loans such as mortgages as well as the interest rate they pay on savings.

The Bank moves rates up and down in order to keep UK inflation – the rate at which prices are increasing – at or near 2%.

When inflation is above that target, the Bank can decide to put rates up. The idea is that this encourages people to spend less, reducing demand for goods and services and limiting price rises.

While, in recent months, inflation has remained above the Bank’s target, signs of rising unemployment and a relatively stagnant economy are likely to push the committee towards an interest rate cut.

The Bank of England’s base rate reached a recent high of 5.25% in 2023, but five cuts since August 2024 brought it down to 4%.

It then held rates at that level at meetings in September and November.

The main inflation measure, CPI, has dropped significantly since the high of 11.1% recorded in October 2022.

It was was 3.2% in the year to November 2025, down from the 3.6% rate recorded in October.

That means prices are still rising, but by less than seen in the summer. However inflation remains well above the Bank of England’s 2% target.

Many analysts have said that a cut at the December meeting is all-but inevitable.

At the previous meeting in November, the four members of the Bank’s nine-member monetary policy committee (MPC) who voted for a cut were only just outvoted by the five who wanted to keep rates on hold.

At the time, the Bank’s governor, Andrew Bailey, said he would “prefer to wait and see” whether inflation continued to drop back.

The Bank’s decision may well be influenced by announcements in the recent UK Budget, as well as developments in the global economy.

Mr Bailey has repeatedly warned about the unpredictable impact of US tariffs, and uncertainty around the world.

Mortgages

Just under a third of households have a mortgage, according to the government’s English Housing Survey.

About 500,000 homeowners have a mortgage that “tracks” the Bank of England’s rate. A 0.25 percentage point cut is likely to mean a typical reduction of £29 in their monthly repayments.

For the additional 500,000 homeowners on standard variable rates, there would typically be a £14 a month fall, assuming their lender passed on the benchmark rate cut.

But the vast majority of mortgage customers have fixed-rate deals. While their monthly payments aren’t immediately affected by a rate change, future deals are.

Mortgage rates have been falling recently, partly owing to the expectation among lenders of a Bank rate cut in December.

As of 17 December, the average two-year fixed residential mortgage rate was 4.82%, according to financial information company Moneyfacts. A five-year rate was 4.90%.

The average two-year tracker rate was 4.66%.

About 800,000 fixed-rate mortgages with an interest rate of 3% or below are expected to expire every year, on average, until the end of 2027. Borrowing costs for customers coming off those deals are expected to rise sharply.

You can see how your mortgage may be affected by future interest rate changes by using our calculator:

Credit cards and loans

Bank of England interest rates also influence the amount charged on credit cards, bank loans and car loans.

Lenders can decide to reduce their own interest rates if Bank cuts make borrowing costs cheaper.

However, this tends to happen very slowly.

Savings

The Bank base rate also affects how much savers earn on their money.

A falling base rate is likely to mean a reduction in the returns offered to savers by banks and building societies.

The current average rate for an easy access savings account is 2.55%, according to Moneyfacts.

Any further cut in rates could particularly affect those who rely on the interest from their savings to top up their income.

In recent years, the UK has had one of the highest interest rates in the G7 – the group representing the world’s seven largest so-called “advanced” economies.

In June 2024, the European Central Bank (ECB) started to cut its main interest rate for the eurozone from an all-time high of 4%.

At its meeting in June 2025 the ECB cut rates by 0.25 percentage points to 2% where they have remained.

The US central bank – the Federal Reserve – has cut interest rates three times since September 2025, taking them to the current range of 3.5% to 3.75%, the lowest since 2022.

President Trump had repeatedly attacked the Fed for not cutting earlier.