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At the time of writing, the Bank of England is yet to meet on the 8th May to make a decision on interest rates. The most recent set of economic data is favourable for a cut, with inflation twenty basis points below expectations at 2.6 percent versus the predicted 2.8 percent rate, but economists are warning of potential inflationary headwinds coming later in 2025 as the impact of increased utility bills filter through to the consumer.
That’s the sort of data that could slow the desire to cut interest rates. However, with the UK economy forecast to grow less than previously predicted because of President Trump’s tariffs, the Bank of England might be forced to lower interest rates to kick-start economic growth.
The impact of tariffs
Like much of the global economy, the conditions for lowering interest rates are being affected by President Trump’s tariffs. The unpredictable nature of the Trump administration is causing central and commercial bankers to wait it out before making decisions, whereas in ordinary times, declining inflation would be quite a compelling reason for a central bank to cut rates. They’re just nervous of having to raise rates again if they see inflation spike.
However, we think it is likely that a series of deals will emerge in the coming months to take some of the heat out of the situation, while also allowing President Trump to present them as proof of the wisdom of his strategy. What he hadn’t bargained for was for China to stare him down and retaliate to the same extent.
Ultimately, a trade war between the US and China is a huge risk to global finances and could cause gilt yields to rise and mortgage lenders to take a defensive stance to lending. Hopefully China’s stance will cause him to pause for thought and the rhetoric will wind back in.
Borrowers reaching the end of their fixed rates
Perhaps some of the keenest observers of the situation will be existing mortgage holders. In 2025, approximately 27% of mortgage holders, which equates to around 891,000 borrowers, are expected to come off their fixed-rate deals. These borrowers will likely face higher variable rates compared to the low rates they enjoyed during the pandemic1, assuming they fixed their rates between 2020 and the start of the Ukraine conflict.
Borrowers on deals from 2020 or 2021 will be in for a shock if they move to their lender’s standard variable rate (SVR) as it will be significantly higher than their current rate.
I would encourage anyone in this situation to get in touch, as you can usually secure a new deal from your existing mortgage provider up to six months before, and if the situation improves, you can make a new application with a different lender three months before the end of your fixed term.
Given how unpredictable the economic situation could be in 2025, this is likely to be your best strategy for securing a favourable rate this year, rather than gambling on preferential rates being available in the weeks before your fixed rate deal ends.
Housebuilding
Housebuilding is projected to reach its highest level in over 40 years due to recent planning reforms2. The government aims to build an additional 170,000 homes by 2029/30, significantly boosting the housing supply3. This is a real positive for the UK market and should lead to greater choice on the market, as well as boosting the overall economy through jobs and activity in the construction sector.
Whether the government achieves it, is another matter, but the reforms have certainly created the most favourable conditions in years.
Of course, the supply of materials could be affected by a global trade war – there’s a theme here!
Affordability
Affordability is anticipated to improve gradually as lower inflation and rising real wages ease financial pressures4. We also think that central bank interest rate cuts will happen and we’re starting to see lenders becoming more competitive with their rates.
We expect house prices to grow, but not in the same way as they did in the period following the last major market correction after the Ukraine war started. The fundamental conditions remain tricky – household disposable income is still being squeezed, and there is slowly rising unemployment and uncertainty. We’ve also just seen the end of the latest Stamp Duty scheme, which offered relief up to £250,000 on purchases.
Many new homebuyers will still need to borrow at least three times their annual income to afford a property5 and that problem is exacerbated in London and the South East as usual, but areas like Manchester are also starting to become unaffordable to those on the average UK wage.
First time buyers, as ever, will be in a strong position if they can get a good deposit together.
Equity release and lifetime mortgages
Slightly rising house prices is good news for anyone looking to release money from their home though. It creates headroom and in combination with reducing interest rates, can make equity release a more attractive option.
Over the last two to three years, we’ve seen interest rates at a level where equity release has appeared expensive and certainly doesn’t go as far as it used to. It’s such a huge financial decision that getting the timing right really does make a huge difference.
Overall, 2025 feels like the sort of year that will light up my phone as there’s so much noise in the media and such a cocktail of factors that can influence the availability of good mortgage deals. Communication between lenders and mortgage advisers remains patchy and service levels can be variable, so I would always advocate leaving yourself as much time as possible to get your new deal sorted.
