In a move that marks a shift in monetary policy, the Bank of England's Monetary Policy Committee (MPC) voted to reduce the base rate to 5.00%, a cut of 0.25 percentage points. This decision, reached by a narrow margin of 5 to 4, represents the first reduction in the base rate in over four years, signalling a potential turning point for the UK housing market.
The MPC's decision to cut interest rates appears to be driven by two key factors. Firstly, inflation has retreated to the 2% target in May and June, alleviating some of the pressure on the economy. Secondly, there were growing concerns that maintaining the previous rate of 5.25% could exert undue pressure on economic growth and the labour market.
Implications for the Housing Market
While a 0.25% reduction may seem modest, it signals the Bank's belief that interest rates are above optimal levels and should trend downward. This will be welcome news to mortgaged households set to refinance soon as well as potential buyers who have been waiting in the wings.
Mortgage rates, which have been moving downwards recently, are likely to continue this trend. The cut should pave the way for more lenders to offer sub-4% mortgage deals, a threshold that could stimulate market activity. However, expectations of dramatic reductions in mortgage rates should be tempered given that the Bank are likely to be cautious about cutting rates too hard, too quickly.
Boosting buyer confidence
The rate cut's most significant impact may be on market sentiment. The news that we’ve likely passed peak rates could boost confidence among potential buyers, particularly upsizers who have been deterred by high borrowing costs and first-time buyers who have been priced out of the market.
For context, each 1% fall in mortgage rates could potentially save the average first-time buyer around £150 per month on a £250,000 loan over 25 years. This saving could be the difference between affordability and unattainability for some new homeowners.
Future outlook
Market expectations suggest further rate cuts, with predictions of a base rate of 4.2% by Q3 2025 and a further reduction to 3.8% by Q3 2026. However, the Bank of England is likely to adopt a cautious approach to avoid cutting rates too aggressively, which could risk reigniting inflationary pressures. This measured approach suggests a gradual easing of monetary policy over the coming years, providing a stable backdrop for the mortgage market and, therefore, the housing market.
Overall, the interest rate cut should trigger a pickup in activity across the housing market during the remainder of the year. But with affordability still stretched, we expect transaction volumes, rather than prices, to receive the bigger boost.
Impact on the Rental Market
The rate cut could also impact the rental market. Existing landlords may feel less burden from high mortgage payments, potentially reducing rent pressures and keeping more landlords out of the red.
Recent data supports this shift. 61% of tenants saw rent increases upon contract renewal this year, down from 80% in 2022 and 2023. This suggests that rental growth may continue to ease, but broader market dynamics are likely to mean rents keep rising faster than inflation.
Lower mortgage rates may also encourage more landlord purchases, potentially adding a little bit more supply into the market which has been under significant pressure in recent years. The number of outstanding buy-to-let mortgages across the UK has fallen by 4.2% since November 2022, from 2.06 million to 1.97 million, indicating a contraction in the private rental sector.
