Mortgage rates: How do UK interest rates affect me and when will they fall?

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

In June, the Bank of England held rates at 5.25% for a seventh time in a row, despite the fact that inflation had fallen to its 2% target.

Some economists had expected rates to fall in August, but the latest inflation figures suggest the Bank may not cut until the autumn.

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 lenders to borrow money.

This influences what other banks charge their customers for loans such as mortgages, and the interest they pay on savings.

The Bank of England moves rates up and down in order to control UK inflation - which is the increase in the price of something over time.

When inflation is high, the Bank may decide to raise rates to keep it at or near the 2% target.

The idea is to encourage people to spend less, to help bring inflation down by reducing demand.

Once this starts to happen, the Bank may hold rates, or cut them.

The current Bank rate of 5.25% is the highest level for 16 years.

However, it was significantly above this for much of the 1980s and 1990s, hitting 17% in November 1979, external.

There have been questions about why interest rates have not been cut, given inflation is now far below its peak of 11.1% in October 2022.

The main inflation measure, CPI, hit 2% in May and remained unchanged in June - this is the lowest rate in almost three years.

When inflation hit the 2% target in May, some economists predicted that the Bank would cut rates at its August meeting.

But the Bank also considers other measures of inflation when deciding how to change rates, and some of these remain higher than it would like.

The latest figures show that some parts of the economy, like the services sector - which includes everything from restaurants to hairdressers - are still seeing significant price rises.

This might mean the Bank decides to hold rates in August and cut at its next meeting in September.

It has to balance the need to slow price rises against the risk of damaging the economy, and avoid cutting rates only to have to raise them again shortly afterwards.

Although UK inflation has hit the Bank's 2% target, it is expected to rise a little over the course of the year before settling back down in early 2025, so it is difficult to predict exactly what will happen to interest rates.

In May, the International Monetary Fund (IMF) recommended that UK interest rates should fall to 3.5% by the end of 2025. The organisation, which advises its members on how to improve their economies, acknowledged that the Bank had to balance the risk of not cutting too quickly before inflation is under control.

But in its latest forecast, the IMF warned that persistent inflation in countries including the UK and US might mean interest rates have to stay "higher for even longer".

Mortgage rates

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

When interest rates rise or fall, around 1.2 million people on tracker and standard variable rate (SVR) deals usually see an immediate change in their payments.

But more than eight in 10 mortgage customers have fixed-rate deals. While their monthly payments aren't immediately affected, any future deals are.

Mortgage rates are much higher than they have been for much of the past decade, with the average two-year fixed rate now at just under 6%, according to the financial information service Moneyfacts.

This means homebuyers and those remortgaging have to pay a lot more than if they had borrowed the same amount a few years ago.

About 1.6 million deals are expiring in 2024, according to banking trade body UK Finance.

You can see how your mortgage may be affected by 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 put their rates up if they expect higher interest rates from the Bank of England. However, if rates fall, interest payments may get cheaper.

Savings

The Bank of England interest rate also affects how much savers can earn on their money.

Individual banks and building societies have been under pressure to pass on higher interest rates to customers.

The UK's financial watchdog has warned banks will face "robust action" if they offer unjustifiably low savings rates.

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, the European Central Bank (ECB) cut its main interest rate from an all-time high of 4% to 3.75%, the first drop in five years.

But in the same month, the US central bank decided to keep its key interest rates at between 5.25% and 5.5% - unchanged since July 2023.

It had previously suggested that there could be three interest rate cuts in 2024, but in June signalled it now expects just one.