Interest rates cut to 3.75%: what you need to know 

The BoE has cut the base rate from 4% to 3.75% on Thursday 18 December, delivering an early Christmas present to millions of homeowners. 

This decision means the cost of borrowing has reached its lowest level in nearly three years. 

Five members of the BoE's Monetary Policy Committee (MPC) voted for the base rate to be reduced to 3.75%, while four members voted to keep interest rates unchanged. 

Analysts had expected the decision to cut the base rate due to concerns about the jobs market and sluggish UK economic growth. The US Federal Reserve's recent reduction in interest rates likely also had an impact.     

UK inflation was 3.2% in November, marking the lowest rate in eight months.  

Looking ahead, most analysts anticipate at least two base rate reductions in 2026, leaving the base rate at 3.25% at the end of next year.   

It’s worth stressing that these forecasts can change, as they are influenced by factors such as inflation, UK growth, and global issues. 

How will mortgage rates be affected?    

In the run-up to today’s decision, mortgage lenders were already reducing fixed-rate deals, but it’s good news for variable-rate mortgage holders as their deals are often linked to the base rate. 

The average five-year fixed-rate mortgage rate is 4.39%, with the lowest rate currently 3.69%, according to Rightmove. The cheapest deals are available to those with a large deposit or more equity in their home.  

While house prices have risen recently, the annual rate has slowed, according to Nationwide. 

Mortgage rates have fallen this year, but it’s still expensive to buy your own home.  

If you’re seeking a mortgage, there are criteria you must meet, including ensuring affordability, having a strong credit score, and clearing debt.    

A qualified mortgage broker can boost your chances of a successful application.   

How will savings rates be affected?    

Savings rates have dropped from a recent peak of over 6% to below 5%. However, this is higher than inflation. 

Rates have been falling this year and are more likely to continue downwards following the base rate cut.      

If you want to try and get better returns, have long-term financial goals, and don’t need easy access to your money, investing could be a good option, but this comes with additional risk.   

While your investments can rise and fall in value, you may want to give yourself time to handle any possible volatility by investing for at least a few years.    

You can quickly match with a qualified financial adviser via Unbiased, who can help you with an investment strategy, review your portfolio, or advise on how to reduce your tax bill legally.    

What about annuities?    

An annuity offers a fixed income for life or a fixed period, making it ideal for retirement.  

Throughout this year, annuity rates have soared by nearly 10%, but they could fall as they are linked to the base rate.    

Unbiased can match you with a financial adviser who can help you find the best annuity for your circumstances.