Now that Labour has revealed its first budget, we have some idea of the way it’s going to approach the economy over the coming years. Government spending, borrowing and taxation can all impact UK inflation, and this then affects the Monetary Policy Committee’s (MPC) decision on whether to raise, lower or hold the Bank Rate – commonly known as the base rate.
It’s this base interest rate that has one of the biggest influences on mortgage rates, so it was good news that it was brought down from 5% to 4.75% on 7th November, as had been widely anticipated. That meant there was nothing in the Autumn Budget to make the MPC rethink its plans, indeed, it sounds as though the Government understands the importance of delivering a stable economy and keeping inflation around the 2% target.
Introduced as “a Budget to fix the foundations of the economy”, Labour announced it would do that by:
- Supporting economic and fiscal stability
- Boosting investment
- Increasing spending on public services
- Balancing the budget so day-to-day spending is met by revenues
- Reducing net financial debt as a share of the economy
However, the decision to raise the cost of National Insurance contributions for employers is forecast by some to lead to price rises for consumers, and the Government has stated that it does intend to borrow more money for investment. Both these factors could move inflation slightly upward, and the Bank of England has already said it expects it to increase from its current 1.7% to 2.5% by the end of 2024.
The Bank has also said, “Based on the evolving evidence, a gradual approach to removing policy restraint remains appropriate”, meaning future base rate reductions could be made at a slower pace than was forecast pre-budget, mainly due to “significant uncertainty around the outlook for the labour market”.
What will this mean for mortgages?
The Office for Budget Responsibility (OBR) has suggested that if inflation does rise as a consequence of the changes in the Budget, we could see average mortgage rates rise by 0.8% between now and the end of 2027. And from our perspective, if the base rate falls more slowly than previously predicted, we agree that lending could tighten in the short term.
Sarah Thompson, Managing Director, Mortgage Scout, says, "As we enter 2025, the mortgage landscape shows signs of settling into a more stable rhythm, creating a positive outlook for buyers and homeowners alike. Starting in early 2024, we saw interest rates at a peak due to efforts to tame inflation. However, as the year progressed, the market has shown encouraging signs of stability, with the Bank of England carefully managing adjustments to keep things on a steady course. Although many hoped for a rapid decrease in rates, the bank’s gradual approach prioritises a balanced recovery, setting up a smoother environment for the year ahead.
“Fixed mortgage rates across lenders, including NatWest and Barclays, have remained conservative. While they may have nudged upward recently due to longer-term predictions, many lenders are now offering more competitive two-year fixed deals, giving borrowers flexibility and options in an environment where interest rates are expected to be stable rather than volatile. This consistency means borrowers can plan with confidence, and those on shorter fixed-term deals are well positioned to take advantage of future shifts.
“Looking forward, house prices are expected to rise by approximately 3% in 2025—a healthy pace that suggests steady value growth without the risk of sudden price hikes. Buyers who take action this year could see the benefits of rising property values as the market gains strength. The projected base rate for 2025, anticipated around 3.75% by the end of the year, also signals a more predictable environment for both buyers and existing homeowners, as mortgage repayments are expected to stabilise rather than fluctuate.
“For those considering a new mortgage or thinking about stepping onto the property ladder, the current landscape offers plenty of opportunity. With prices likely to continue their upward trend, waiting for significant rate drops may not yield the savings some expect. In fact, buying sooner could allow you to lock in value before house prices rise further.”
If the Bank of England is correct in its current prediction that the base rate will continue to fall and then hold steady at around 3.6% during 2026 and 2027, that may encourage lenders to become more competitive once again.
For individual landlords, we would advise speaking with a buy-to-let specialist broker on a regular basis as we go through this period of uncertainty, waiting to see what impact the Budget changes have on inflation and interest rates.
If you would like to discuss your current borrowing and options for refinancing, or you’re thinking of making a new investment in the coming months, we’re here to help. Get in touch with our experts via online chat, by completing our enquiry form or by calling 0800 144 4744.
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