Culminating the year on a high note, the Bank of England slashed the bank rate on 18 December from 4.00% to 3.75%. This is the fourth time in 2025 that the Bank of England has reduced the bank rate, compared to only two times where the Bank of England voted in favour of bank rate reductions between August 2023 and November 2024. Easing bank rates have facilitated interest rate reductions across the mortgage market.
Because of these economic conditions, there is the expectation that mortgage rates will continue to decline throughout 2026.
Current Climate
Around 533,000 have their mortgage rate tied to the Bank of England’s bank rate. Correspondingly, the continued bank rate reductions, previously standing at a historic high in 2023 of 5.25%, have greatly assisted in easing financial mortgage pressures. The latest cut in December, for example, has saved the average base-rate borrower £29 in monthly repayments.
Even though most mortgage borrowers (86%) are on fixed-rate mortgages, the lowered bank rate has played a significant role in shaping mortgage schemes across the market.
John Fraser-Tucker, a broker at Mojo Mortgages, said: ‘Even a small base rate reduction acts as a vital catalyst for affordability, potentially releasing a wave of pent-up demand from buyers who have been sitting on the fence while rates hovered at 4%.’
Borrowers are generally benefitting from lowered mortgage rates and a greater selection of mortgage schemes, which is reflected in the volume of lending for property purchases growing by 22% to £176 billion in 2025. For a two-year fixed deal, the average rate has fallen from 5.46% to 4.93%; for a five-year fixed deal, the average rate has fallen from 5.26% to 4.98%.
Moneyfacts observed that the scale of mortgage rate reductions has steadily declined over 2025. The average mortgage rate, according to Moneyfacts, during the first quarter of 2025 was 5.39%. This fell to 5.19% in the second quarter, 5.05% in the third quarter, and finally 4.97% in the fourth quarter.
Swap rates have fallen over 2025, with the average rate for a two-year fixed deal standing at 4.87%, down from the peak of 6.6% in October 2022. Similarly, the average tracker rate for a two-year fixed deal is now 4.66%.
In turn, mortgage rates have seen noticeable reductions across the market in 2025, moving past the historic high rates that had inhibited consumer participation and exacerbated affordability challenges.
2026 Estimates
A key element behind the aggregate mortgage rate is informed by the Bank of England’s bank rate. Adam French, an analyst at Moneyfacts, observed that mortgage rates are influenced by the bank rate, saying: ‘Historically, we’ve seen the average mortgage rates track at 0.8pc above the Bank Rate.’
For this reason, much of the speculation concerning mortgage rates is predicated on the trajectory of the bank rate in 2026. Bank of England Governor Andrew Bailey stated that the bank rate is still ‘on a gradual path downwards’, but cautioned that ‘with every cut we make, how much further we go becomes a closer call.’
A Reuters survey suggested that around two-thirds of economists polled expect the bank rate to decline to 3.50% in March. There was no majority expectation regarding any future cuts for 2026, though the median forecast showed that the bank rate may dip to 3.25% by the third quarter of 2026.
Adam French said: ‘If the Bank of England Base Rate settles around 3.5% in 2026, as current forecasts suggest, that may represent a more ‘neutral’ interest rate environment […] On that basis, a 3-3.5% Base Rate suggests average mortgage rates settling between 4% and 4.5%, lower than today, but still substantially higher than the ultra-cheap borrowing many households became accustomed to in the 2010s.’
Furthermore, around 1.8 million fixed-rate mortgages are expected to expire in 2026. ‘The biggest winners’, Lorna Hopes, a mortgage specialist at Smith & Pinching, said, ‘might be the thousands of people due to come off a two-year fixed-rate deal in 2026 – [as] they should be able to remortgage onto a much lower rate.’
Due to these converging market conditions, Simon Gammon, a managing partner at Knight Frank, argued that mortgage rates across the market will continue to be trimmed, contributing to ‘what we expect to be a highly competitive January.’
General Expectations
It is widely accepted that mortgage rates will further fall in 2026. Typical fixed-rate mortgages are expected to stabilise near 4%, undergirded by the bank rate settling at around 3.25% to 3.5%. In many respects, the mortgage sector is moving – in the words of Chris Storey, the chief commercial officer at Atom Bank – from ‘a story of caution to one of measured momentum.’
Such a sentiment shift deriving from lowered mortgage rates is a positive result for the property industry, one that will influence market activity in 2026.
