The Bank of England has announced a 0.25% reduction in the Base Rate, bringing it down to 3.75%. This marks the fourth cut of 2025, driven by a sharper-than-expected fall in inflation to 3.2% (down from 3.6%). Key Market Shifts Expert Insight Matt Smith, Rightmove's mortgage expert, notes: "The financial markets... responded early with mortgage …
Base Rate Cut to 3.75%: What It Means for Mortgages
The Bank of England has announced a 0.25% reduction in the Base Rate, bringing it down to 3.75%. This marks the fourth cut of 2025, driven by a sharper-than-expected fall in inflation to 3.2% (down from 3.6%).
Key Market Shifts
- 2-Year Fixes are Cheaper: For the first time in years, average 2-year fixed rates are now cheaper than 5-year fixed rates.
- The Trend: Previously, 5-year rates were lower because markets expected long-term rates to fall. Now, with future cuts less certain and short-term risks easing, 2-year deals have become the more cost-effective option.
- Current Rates: The average 2-year fixed rate is roughly 0.1% lower than the average 5-year rate.
- Falling Costs: Mortgage rates have been dropping steadily.
- Average 5-year fixed: 4.24% (down 0.82% year-on-year).
- Average 2-year fixed: 4.35% (down 0.47% year-on-year). (Note: While the year-on-year drop is clear, the shift to 2-year being cheaper is a very recent market development)
Expert Insight
Matt Smith, Rightmove’s mortgage expert, notes:
“The financial markets… responded early with mortgage rate cuts in December… Bank Rate cut headlines are always positive… even if this one has already been baked into mortgage rate cuts.”
- Outlook: Don’t expect immediate massive drops before Christmas. However, the lower inflation figures suggest a fresh round of rate cuts in the New Year, particularly for 2-year fixed products.
- Prediction: The gap between 2-year and 5-year deals is expected to grow in 2026.
Impact on Borrowers
| Mortgage Type | Impact of 3.75% Rate | Action Plan |
| Fixed-Rate | No immediate change. Your monthly payments remain locked until your deal ends. | If your deal ends soon (within 6 months), use the Mortgage Charter to lock in a new rate now to hedge against volatility. |
| Tracker / Variable | Immediate decrease. Your monthly payments will drop in line with the 0.25% reduction. | Check your next statement to see the updated payment amount. |
| Standard Variable (SVR) | High costs. The average SVR is currently 7.11%. | Urgent: If you are on an SVR, consider remortgaging to a fixed deal to avoid these high rates. |
Affordability & Future Outlook
- Stress Tests: Lenders’ “stress tests” (usually SVR + 1%) may ease as SVRs fall, potentially improving borrowing power for buyers.
- 2026 Forecast: The financial markets forecast another cut in 2026, with potentially two cuts total across the year.
- Next Announcement: The next Bank of England decision is scheduled for Thursday, 6 February 2026.
