How you could take advantage of falling interest rates

16/07/2025

Interest rates are expected to fall in 2025. If you’re a homeowner, it could present an opportunity to reduce your mortgage repayments and boost your finances overall.

The Bank of England (BoE) increased the base interest rate when inflation was high as a way to slow down the rising cost of goods and services. Between December 2021 and August 2023, the central bank’s interest rate increased from 0.1% to 5.25%.

For savers, this news is likely to have been welcomed, as the interest rate they received on their savings typically increased. However, for borrowers, including those with a mortgage, it often meant the interest they were paying increased.

As you’re typically borrowing large sums through a mortgage, even a relatively small increase in the interest rate you pay can have an impact. Let’s say you’ve borrowed £250,000 through a 25-year repayment mortgage, with an interest rate of:

• 3%, your monthly repayment would be £1,185 and you’d pay around £105,500 in interest over the full mortgage term
• 5%, your monthly repayment would be £1,462 and you’d pay around £188,600 in interest over the full mortgage term.

The good news is that inflation has stabilised and interest rates have already started to fall. As of December 2024, the BoE’s base interest rate is 4.75%.

Many experts are predicting that interest rates will fall further in 2025. Indeed, Investec predicts the UK bank rate will fall to 3.75% by the end of 2025.

So, how could you take advantage of this to reduce your outgoings and the overall cost of borrowing?

If your mortgage deal will expire in the coming months, you could find your new mortgage offers terms that are better suited to your needs. You can often lock in a deal up to six months before your existing one ends.

If your current mortgage won’t expire in 2025, you could still take out a new deal that benefits from a lower rate of interest. However, you’d usually have to pay an early repayment charge, so it may be important to weigh up the financial pros and cons.

With interest rates expected to continue falling in 2025, read on to find out the potential benefits of choosing a mortgage with a variable or tracker interest rate.

A variable- or tracker-rate mortgage means you could benefit from interest rate falls

When you choose a tracker-rate mortgage, the interest rate you pay will follow the base interest rate set by the BoE. So, when the central bank makes cuts, your repayments will fall. Similarly, a variable-rate mortgage follows the interest rate set by your lender, which is likely to fall when the BoE reduces the base rate.

Given the expectations that interest rates will fall, choosing a mortgage with a variable- or tracker-rate could mean you benefit from lower repayments sooner.

While signs point towards interest rates falling throughout 2025, this cannot be guaranteed. There’s a chance interest rates could rise, which would affect your mortgage repayments.

Many external factors influence the BoE’s decisions, including the rate of inflation and economic outlook. Indeed, interest rates rising in 2022 and 2023 were partly due to the Covid-19 pandemic and the war in Ukraine – factors that experts didn’t anticipate when making previous forecasts.

So, if you’ll be taking out a variable- or tracker-rate mortgage, you might want to consider how you’d cope financially if the interest rate remained the same or even increased. It could mean you’re better prepared should the unexpected happen.

A fixed-rate mortgage could offer you certainty when creating a budget

While falling interest rates would mean homeowners who choose a variable- or tracker-rate mortgage could benefit, there might still be reasons to choose a fixed-rate mortgage.

With a fixed-rate mortgage, the interest rate you pay and your repayments will remain the same throughout the mortgage deal. So, this could be a valuable option if you want to be certain of your mortgage repayments and don’t want to worry about costs unexpectedly rising.

With interest rates expected to fall, choosing a shorter fixed-rate mortgage deal could make sense. So, rather than opting to fix the interest rate you pay for five years, you might choose to do so for two years.

Contact us to talk about your mortgage needs

Finding a mortgage that’s right for your needs is important, and you could secure a competitive deal that means your repayments are lower. If you’d like help when searching for your next mortgage or you have any questions about which option is right for you, please get in touch.

Please note:

This blog is for general information only and does not constitute financial advice, which should be based on your individual circumstances. The information is aimed at retail clients only.

Your home may be repossessed if you do not keep up repayments on a mortgage or other loans secured on it.