UK Interest Rate Cuts: What They Mean for Two & Five Year Rates and the Housing Market
After a prolonged period of high interest rates aimed at tackling inflation, the Bank of England (BoE) has started to ease monetary policy.
In May 2025, the BoE reduced the base rate to 4.25%, down from a peak of 5.25% in 2024. Further cuts are expected throughout the year, with many analysts predicting a rate of 3.75% or lower by the end of 2025.
But what does this mean for mortgage holders and the wider housing market—particularly for those considering 2- or 5-year fixed mortgage deals?
Rate Cuts: A Shift in Momentum
The UK economy has begun to stabilise, with inflation falling closer to the BoE's 2% target. This has given policymakers the confidence to begin easing the pressure on borrowers. With more cuts projected before the end of the year, lenders are starting to adjust their mortgage offerings to stay competitive in a more fluid and responsive rate environment.
2-Year and 5-Year Mortgage Rates: Falling, But Gradually
As of June 2025:
● Average 2-year fixed mortgage rates sit between 3.9% and 4.6%.
● 5-year fixed deals average between 4.0% and 4.5%, with the most competitive rates dipping below 3.9%.
Expectations are that rates will continue to fall throughout the summer and into Q4, especially as the next BoE cut—potentially bringing the base rate to 4.00% or even 3.75%—is priced into the market.
What does this mean for borrowers?
● 2-year fixed deals will become increasingly attractive for those expecting further rate declines and seeking short-term flexibility.
● 5-year fixed rates, already showing signs of softening, may offer the greatest value for stability-focused buyers who want to lock in a favourable rate before the next up-cycle.
What This Means for the Housing Market
The housing market, which has cooled over the past 18 months due to affordability constraints, is beginning to see green shoots.
1. Buyer Confidence Is Returning
Lower rates mean lower monthly repayments, improving affordability for first-time buyers and up-sizers alike. Expect a gradual rise in buyer activity, especially in late summer as more competitive deals come to market.
2. Price Stabilisation—Not a Boom
While improved borrowing conditions support demand, prices aren’t expected to surge. Instead, we’re likely to see flat to modest growth in house prices over the next 12 months, especially in regions where prices adjusted significantly in 2023–24.
3. Increased Remortgaging Activity
Roughly 1.6 million mortgage deals are due to expire in 2025. Many homeowners on higher fixed rates from previous years will now look to remortgage at today’s lower rates—either with their current lender or through competitive switching.
4. More Mobility in the Market
With better rates and stable prices, expect increased listings and transactions, particularly among homeowners who had delayed moves during the rate peak.
What Should Borrowers and Buyers Do Now?
● If buying: Shop around for deals now, as sub-4% fixed rates are already appearing. A 5-year fix may offer the best long-term security with current market sentiment.
● If remortgaging: Don’t wait until your deal ends—start early. Lenders will often let you lock in a new rate up to six months in advance.
● If on a variable rate: You’ll benefit quickly from rate cuts, but consider whether a fixed deal could offer peace of mind if the base rate plateaus or unexpectedly rises again.
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