Bank of England Issues Crucial Warning for Mortgage Holders Despite Interest Rate Cut
Bank of England Issues Crucial Warning for Mortgage Holders Despite Interest Rate Cut
The Bank of England has issued an urgent update that all mortgage holders—and prospective borrowers—should pay close attention to. Despite a recent cut in the UK’s base interest rate, the central bank warns that millions of households could still face significantly higher monthly mortgage repayments as they refinance in 2025.
In its May 2025 Monetary Policy Report, the Bank of England acknowledged some early signs of relief in mortgage markets. However, it stressed that many borrowers will not immediately feel the benefits of the recent rate cut. For those with fixed-rate mortgages expiring this year, the road ahead could still be financially challenging.
A Welcome Rate Cut—But With Limited Immediate Relief
At its most recent meeting, the Bank’s Monetary Policy Committee (MPC) voted to lower the UK’s base interest rate from 4.5% to 4.25%. This decision marked a cautious step toward loosening monetary conditions amid a backdrop of slowing inflation and faltering economic growth.
Lower interest rates typically pave the way for cheaper borrowing, including mortgages. However, the Bank was quick to emphasize that mortgage holders should not expect immediate and significant drops in their repayments.
In fact, the Monetary Policy Report warned that "effective rates on new mortgages with a fixed-rate period of between two and five years... remain around 130 basis points higher than the corresponding rates on outstanding mortgages." This implies that many borrowers—particularly those exiting fixed-rate deals arranged several years ago—could still experience a substantial increase in their monthly repayments.
Why Are Mortgage Payments Still Rising?
Mortgage rates have fluctuated widely over the past few years, primarily due to the Bank of England's aggressive interest rate hikes from late 2021 to late 2023, in an effort to tame soaring inflation. During that period, the base rate climbed from historic lows to a peak of 5.25%.
Although the May 2025 rate cut signals a potential shift toward easing, the effects of prior increases are still working their way through the financial system. Lenders tend to price new mortgage products based on market swap rates—which are influenced by expectations for future interest rates rather than just the current base rate.
This means the cost of borrowing remains elevated, particularly for new fixed-rate mortgage products. According to the Bank’s report, the effective interest rate on the stock of outstanding fixed-rate mortgages is expected to increase further in the coming years, despite current headline rate cuts.
Limited Improvements in New Deals
There is some evidence of softening in mortgage pricing. The Bank’s report noted a modest fall in swap rates, which has led to a small drop in quoted rates for two- and five-year fixed mortgages.
Specifically, the Bank stated: "Quoted rates on two and five-year fixed-rate mortgages at 75% and 90% loan-to-value fell by 20–35 basis points between January and April, consistent with falls in OIS rates at those maturities."
While this trend is encouraging, the reductions are relatively minor and may not be enough to offset the pressure on households coming off much lower fixed rates secured several years ago.
1.5 Million Mortgage Deals Expiring in 2025
Perhaps the most pressing issue is the sheer number of households set to remortgage this year. An estimated 1.5 million fixed-rate mortgage deals are due to expire in 2025, with most borrowers expected to shift onto significantly more expensive terms.
A recent study by Compare the Market highlights a stark divide: while 937,433 borrowers who took out two-year deals in 2023 might benefit from refinancing into slightly lower rates, many others—particularly those coming off ultra-low pandemic-era deals—face steep payment increases.
Failing to refinance could be even worse. Homeowners who allow their fixed-rate deals to lapse without securing a new one are typically transferred onto their lender’s Standard Variable Rate (SVR). These rates are usually much higher than fixed-rate products, and the Compare the Market report warns this could lead to an average increase of £2,861 per year in mortgage payments.
Extending Mortgage Terms: A Rising Trend
In response to mounting affordability issues, more borrowers are opting to extend their mortgage terms to reduce their monthly payments. The Bank noted a significant behavioural shift: “Over half of new mortgages now have a term of 30 years or more, compared to around 30% in 2015.”
While this strategy can ease short-term financial pressure, it comes at a cost. Longer mortgage terms increase the total interest paid over the life of the loan, potentially leaving homeowners worse off in the long run.
Demand for Mortgages Holding Steady—for Now
Despite these challenges, the Bank reported that demand for mortgage borrowing has remained relatively stable in recent months. According to its Credit Conditions Survey, lenders expect the availability of secured credit to remain unchanged throughout the second quarter of 2025.
This suggests that while borrowing has not collapsed, overall market activity remains subdued. A combination of higher mortgage costs, stretched household budgets, and weakened affordability continues to constrain both homebuyers and remortgagers.
Caution for Borrowers: Secure a New Deal Early
Industry experts are urging homeowners with fixed-rate deals ending soon to act early and shop around for new mortgage offers. Failing to lock in a competitive rate in time could mean falling back onto a costly SVR, as thousands of borrowers discovered during the rapid rate rises of 2022 and 2023.
Even though fixed mortgage rates have dipped slightly, the Bank’s broader message is clear: the average cost of borrowing remains well above what many households have grown accustomed to. Acting early and comparing options may be the best defense against unnecessary financial strain.
What Should Borrowers Do?
If you have a mortgage that’s set to expire this year, there are several steps you can take:
- Start researching early – Use comparison sites and speak to independent mortgage brokers to understand your options.
- Consider a tracker mortgage – These can initially be cheaper than fixed rates but come with the risk of rising if the base rate increases again.
- Look into term extensions cautiously – Lower monthly payments might be appealing, but extending the term significantly raises the total cost of your mortgage.
- Review your lender's SVR – Know the rate you’ll revert to if you don’t arrange a new deal, and budget accordingly.
- Consider overpayments – If you’re on a good deal now, making voluntary overpayments could reduce your principal and lower future refinancing stress
A Mixed Outlook for 2025 and Beyond
While the Bank of England’s rate cut may hint at the beginning of a more borrower-friendly environment, the transition will be slow. Mortgage holders should not expect a return to the ultra-low interest rates seen during the pandemic. Instead, the market is likely entering a new normal where borrowing is costlier, terms are longer, and affordability is under pressure.
Economic uncertainty also remains a key risk. While inflation has cooled, concerns over stagflation—a mix of stagnating growth and persistent inflation—continue to cloud the outlook. Any resurgence in inflation could lead the Bank to reverse its current policy direction.
Final Thoughts
The Bank of England’s latest warning is a sobering reminder that despite improving headline figures, the financial burden on households remains heavy. For the 1.5 million UK mortgage holders set to refinance this year, early action and careful financial planning could make the difference between stability and struggle.
Mortgage rates may be on a slow decline, but the legacy of previous rate hikes lingers. The base rate might be falling, but for many households, the real cost of borrowing is still heading upward.
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