Dependant on the Bank of England reducing interest rates, mortgage repayment obligations are at stake
The Bank of England's Monetary Policy Committee (MPC) has lowered the Bank Rate by 0.25 percentage points to 4% in August 2025, marking a cautious easing of monetary policy [1][4][5]. This decision comes after a year of gradual rate cuts, supported by disinflation and slowing wage growth.
The reduction in the Bank Rate is expected to lead to lower mortgage interest rates over time, particularly for variable and tracker mortgages linked to the Bank Rate. This easing of mortgage rates could reduce borrowers’ monthly payment burdens, potentially lowering the risk of mortgage arrears and homeowner financial distress. However, the MPC has cautioned about inflationary risks and is proceeding carefully, so further cuts may be gradual rather than aggressive [5].
The drop in mortgage arrears, as reported by Pepper Advantage, reflects the benefits in household budgets from less inflationary pressures and lower interest rates. Fresh loans tumbled 3.2% due to the Stamp Duty deadline on 31 March, and direct debit rejections were down 5.1% in the same period.
Across the UK, mortgage arrears fell by 4.4% in the second quarter, marking the first time since the pandemic that both mortgage arrears and direct debit rejections have declined. Wales was second with a 7.7% reduction in mortgage arrears, while London had the smallest dip at 0.9%. The North West led the pack with a 7.9% reduction in mortgage arrears.
The MPC's decision to cut rates signals a balance between supporting the economy and keeping inflation in check. The committee remains vigilant about inflation pressures but is balancing this against risks of economic slowdown. The Bank of England is set to make a decision on interest rates on Thursday.
Harriet Guevara, chief savings officer at Nottingham Building Society, suggests that further rate reductions would signal a "gradual easing in the cost of borrowing". However, Aaron Milburn, UK managing director at Pepper Advantage, warns that any recovery in the mortgage market remains fragile.
The MPC has slashed rates four times in the last year, after they reached a post-financial crisis high of 5.25 per cent in August 2023 and were held at that level for nearly 12 months. Those coming to the end of fixed mortgage deals later this year may find better options opening up due to potential further rate reductions.
The National Institute of Economic and Social Research (NIESR) projects one more rate cut in 2025, following an August reduction. NIESR also predicts a rate cut in early 2026, earlier than previously projected. The MPC's split decision suggests a careful balance between supporting the economy and keeping inflation in check [1][4][5].
[1] Bank of England press release: https://www.bankofengland.co.uk/boeapps/media/boe/static/content/news/2025/08/m082525.pdf [2] NIESR press release: https://www.niesr.ac.uk/press-release/niesr-forecasts-one-more-rate-cut-2025-following-august-reduction [3] Pepper Advantage report: https://www.pepperadvantage.co.uk/uk-mortgage-arrears-fall-to-their-lowest-level-since-the-pandemic/ [4] Financial Times article: https://www.ft.com/content/76c7093a-45b3-421d-8c34-88b2c23e9c11 [5] BBC News article: https://www.bbc.co.uk/news/business-56253916
- The reduction in the Bank Rate may encourage more activity in the property market, as lower mortgage interest rates could make homeownership more affordable for some individuals, possibly leading to an increase in business activity in the banking sector.
- The lower mortgage interest rates might also contribute to a boost in consumer spending, as reduced monthly payment burdens could free up funds for purchases in other areas of the economy, potentially stimulating overall economic growth.
- With further possible rate cuts in the near future and the potential for more favorable financing options, the finance industry may witness an upsurge in loan applications for property and business ventures, offering a positive outlook for the economy as a whole.
