“Make no mistake, a stable base rate is important – it allows lenders, brokers and borrowers to act with confidence. It means product rates will remain largely consistent and allow borrowers to effectively plot their future property investments.”
– Ben Nichols – RAW Capital Partners
Where will interest rates go next?
This question has been bandied around constantly since 2021, dominating conversations in the lending and savings markets.
Now is a timely moment to reflect on this trend. We are nearing three years since the Bank of England started its hiking cycle, taking the base rate from an all-time low of 0.1% in December 2021 to a 14-year high of 5.25% by August 2023. Since then, we have seen rates stabilise, with two rate cuts since the summer now spurring conversations about how low the base rate could drop in 2025.
On the one hand, the incessant speculation about where rates are heading is understandable. The cost of borrowing is a crucial factor in determining the direction of house prices and transactional activity across the property market. On the other hand, however, such speculation can also be paralysing – buyers and sellers alike have a propensity to pause their plans as they wait for greater clarity on whether interest rates are going to go up or down.
Perspective is important in these discussions, and this requires us to rethink our view of what a “normal” base rate looks like. Indeed, as we near another base rate decision by the Bank of England on 19 December, it is worth reflecting on longer-term rate trends and, in turn, assessing the impact of interest rates on the property market.
A normal base rate
Property buyers who are a little longer in the tooth will no doubt still remember how high interest rates were in the second half of the 20th century.
Rewind 45 years, in November 1979, the Bank of England’s base rate hit a record high of 17%. This came after years of major fluctuations – from 15% in October 1976, the base rate had fallen to 5% within 12 months, before then rising to that all-time peak two years after that. Plotted on a graph, the speed at which rates went up and down becomes clear.
Moving through the 1980s and ‘90s, a similar trend can be seen – not only did the base rate reside well above 10%, but it would also lurch sharply in one direction or the other.
In the 21st century, the line on the graph looks very different. There was stability for much of the first decade of this century, with the onset of the 2008 global financial crisis then dragging the base rate to levels below 1%, where it would remain until 2022.
That 14-year period has, of course, warped many people’s expectations where interest rates are concerned. The cost of borrowing remaining so low for so long meant that the sudden increases in 2022 and 2023 came as a shock to some. As noted, it has also reignited speculation about what comes next.
It must be stressed that the point of this brief review of the history of the Bank of England’s base rate is certainly not to suggest that property investors in different decades have had it significantly easier or harder than those in other eras; there are other important variables, such as average house prices, salaries and inflation that must be factored into the equation.
Rather, there are two points to stress: firstly, the base rate has always been known to swing wildly from year to year. This century those swings have been less violent than had been the norm between 1970 and 2000. Secondly, the average base rate between 1971 and 2024 was 7.08%, meaning that while borrowers today are facing a notably higher cost of borrowing than they had been accustomed to in the 2010s, the current base rate remains below the mean.
Looking beyond the questions of a “normal” base rate
Make no mistake, a stable base rate is important – it allows lenders, brokers and borrowers to act with confidence. It means product rates will remain largely consistent and allow borrowers to effectively plot their future property investments.
But small fluctuations are natural and healthy. That period in the 2010s when the base rate dragged along near 0% was indicative of the national and global economy struggling after a banking sector collapse – it may have favoured borrowers, but it was abnormal. We have now entered a period in which the base rate may well move between 3% and 6% over the coming years.
Looking to 2025, while there is seldom any broad consensus, economists are expecting that the base rate will continue to fall slowly to reach 3.5% by the end of next year. This will certainly help buoy property buyers and ignite greater property price growth – but these are nonetheless modest shifts, and it is important that lenders and brokers move the conversation beyond predicting the Bank of England’s interest rates decisions.
Property investors – namely, buy-to-let investors – are typically very pragmatic. They will assess the cost of a BTL mortgage at any given time and judge the amount they can or will spend on a property accordingly; fixing whether rates might be significantly lower or higher in 12 months’ time is therefore counterproductive.
Lenders and brokers must work closely together to deliver the right products, with speed but also with sufficient flexibility to support a broad range of different BTL borrowers. This will help inject greater confidence and growth into the property market, ensuring deals can still be done at pace, rather than allowing speculation to stunt progress.