What's happening to UK interest rates and what does it mean for mortgages?

The Bank of England has maintained the UK's interest rate at 3.75% for six consecutive meetings, despite global economic upheaval caused by the war between the US and Iran. This decision comes after the U.S.-Israeli conflict pushed up inflation worldwide, making rate cuts less likely and rate hikes more plausible. Interest rates have a direct impact on mortgages, credit card, and savings rates for millions of people.

The Bank of England's base rate, which is the cost at which it lends money to other banks, influences what they charge their customers for mortgages and the interest they pay on savings. The central bank raises rates to curb inflation, which occurs when prices increase beyond the target rate of 2%. Inflation rates have been declining since peaking at 11.1% in October 2022, but they have started to rise again due to increased energy costs.

The Bank of England had been expected to lower interest rates twice in 2026, but the ongoing energy cost volatility has changed this outlook. Analysts believe that rates will likely increase before the year's end. The Bank of England's rate changes affect various sectors, including mortgages, credit cards, bank loans, car loans, and savings accounts.

Around 87% of mortgage holders have fixed-rate deals, so any rate changes will primarily affect their future rates. The average two-year and five-year fixed-rate mortgages have recently reached their highest levels since May 2022 and November 2023, respectively. This could lead to a sharp increase in borrowing costs for customers transitioning from fixed-rate deals.

The Bank of England's interest rate decisions also impact credit card, bank loan, and car loan interest rates, as well as savings account returns.