The Bank of England’s interest rate has a significant impact on millions of individuals in the UK, affecting mortgage, credit card, and savings rates. Since January 2021, the Bank’s short-term rate has changed very quickly. It reached a high of 11.1% in October of 2022, before quickly descending to 1.7% by September of 2024. After reaching its historical low point, the interest rate started to rise again. This increase in proverbial boats made plenty of homeowners and savers nervous about their own financial security.
Through summer and into early fall, mortgage rates have been much higher than they’ve been on average throughout history. According to our data from Moneyfacts, as of September 19, the average two-year tracker mortgage rate was 4.66%. By contrast, the average two-year fixed residential mortgage rate was a bit higher at 4.88%. These figures have created alarm among the home-owning public, especially for those with mortgages directly tied to the Bank of England’s base rate. Around 500k home owners continue to have a mortgage linked to this rate, but that makes them subject to risks.
This unpredictability in interest rates has made headlines, but it has sparked concerns for those with fixed-rate mortgages. As many as 800,000 of these fixed-rate mortgages with interest rates at or below 3% will naturally turn over every year. This trend is likely to persist through the end of 2027. Homeowners nearing the end of these agreements face the prospect of significantly higher borrowing costs, as they transition to new loans at current market rates.
The Bank of England’s rate reached its highest point in late 2022. Now, the UK has one of the highest interest rates of the G7 countries. This reality is particularly jarring given the recent Congressional passage of their climate infrastructure bill. To that end, the European Central Bank took a good step recently. It lowered its benchmark interest rate for the eurozone from a record high of 4% in June 2024. As the US Federal Reserve rapidly sliced interest rates in September and October, the domestic case for the cap eroded. They followed suit by lowering their rates to between 3.75% and 4%.
Despite these adjustments in global interest rates, the current average rate for an easy access savings account in the UK remains at 2.51%. This figure illustrates how savings have in some cases not fully adjusted to the extreme borrowing costs currently experienced by consumers. The widening gap between borrowing and saving rates adds a new layer of financial distress for borrowers.
The continuing volatile environment with interest rates has many people wondering when the market will ever go down again. Analysts are divided on when the BoE will next raise rates. They are fighting over how sweeping these changes should be, given the prevailing economic climate. Inflation, employment, and consumer spending are three of the largest indicators that will weigh heavily on how decisions are made going forward.