Figuring out how interest rates and house prices link together is important if you’re interested in buying or selling a property. We discuss how these big economic factors connect and what they mean for the UK housing market, starting with the Bank of England base rate and interest rate history.
What is the Bank of England base rate?
The Bank of England base rate (also known as the interest rate) is the amount that the Bank of England charges other banks and lenders to borrow money.
It has an effect on all other interest rates in the UK; it influences the amount that lenders charge their customers for borrowing money for their mortgages and loans etc. It also determines how much interest people receive on any savings they have.
Generally speaking, if the Bank of England base rate falls, then the interest rates on our loans and savings may also fall (depending on your specific terms and conditions).
Interest rate history
The Bank of England’s base rate has been coming down gradually over recent months after seeing a huge hike from 0.1% in 2021 to 5.25% in August 2023. It remained that high until August 2024, when the base rate was cut to 5%, and it was reduced again in November 2024, to 4.75%. In February this year, the base rate was cut further, to 4.5%, which is the lowest it’s been since June 2023.
When deciding about any base rate cuts, the Bank of England has to balance the effects it would have on the wider economy. The Bank uses the base rate to calm inflation, which soared to 11.1% in October 2022. (Inflation is the change in prices for goods and services over time.) The Bank of England will do all it can to try and get the Consumer Prices Index (CPI), which is the main inflation measure, back down to 2%. The increased Bank of England base rates across 2022-2023 were put in place to try and bring down the incredibly high inflation.
The CPI for the year ending in February 2025 was 2.8%, representing a slight decrease from the 3% recorded for the year ending in January 2025. So, whilst it’s going in the right direction, the Bank of England will want to do more to encourage it down further, until it reaches 2%.
On 20th March 2025, the Bank of England announced that it is holding the base rate at 4.5%. This is due to the uncertainty around the global economic climate, and the Bank is also aware that there will be increased costs to employers starting in April 2025. Employers will start to pay higher National Insurance amounts, and the minimum wage will also begin going up.
What’s the correlation between interest rates and house prices?
The property market reacts to supply and demand. This means when property owners are struggling with high interest rates, fewer properties come on the market, demand wanes and everything slows down. Therefore, the value of your house is more likely to fall as market activity declines.
However, when interest rates are low, buyers and sellers feel more confident in borrowing money. This encourages the housing market, as people feel more able to get bigger mortgages for larger homes, and first-time buyers feel they can afford to enter the market. The increased supply of affordable properties attracts more buyers, which in turn drives up demand and leads to higher property prices.
Will house prices and mortgage rates go down?
It’s very difficult to predict the future of the economy right now because there’s so much influx. However, it’s expected that interest rates will go down further across 2025, and that house prices will gradually begin to rise.
Whether your mortgage rate will change or not, depends on the type of mortgage you have. If you’re on a tracker mortgage, your monthly mortgage repayments will go down immediately if the base rate goes down. However, if you’re on a fixed-term contract, your monthly repayments would stay the same. You’ll only see changes at the end of your current mortgage deal when you can negotiate a new deal or start tracking the base rate.
With interest rates coming down since August 2024, buyers and sellers have been brought back into the housing market. In December 2024, the average house price rose to £268,087, which was a 4.6% increase year-on-year. Zoopla showed that up to the 4th February 2025, home buyer demand was up 9% on the previous year, with 11% more sales agreed. This is very encouraging, and Zoopla forecasts a 2.5% UK house price growth across 2025.
However, the amount that house prices change varies across the UK, whilst the base rate doesn’t. This means that interest rates are not the only factor affecting house prices. The correlation between interest rates and house prices goes back to supply and demand, and this can be very localised.
For example, house prices in areas like London and the South East are incredibly responsive to interest rate rises, because there’s already a limited supply of properties available, and less land left to develop. In many northern areas, there’s less restriction on housing development projects, so the supply of properties isn’t as greatly affected when interest rates rise. Whilst property prices may fall, it will be a less dramatic fall than in many parts of London and the South East. That’s why it’s always important to have a conversation with your trusted, local estate agent whenever you consider investing more in property, or selling your home.
The forecast for the housing market in 2025 is positive, and the year has started well. It’s still expected that the Bank of England’s base rate will come down across the year, which is good news for mortgage owners. However, it’s likely to be a bit of a bumpy ride, with any interest rate changes being affected by the wider economy and global trade negotiations.
If you’re thinking about putting your home on the market but you’re not sure it’s the right time, start with our no-obligation, free property valuation. This gives you an opportunity to ask our agents any questions you have whilst getting a fully accurate and up-to-date property valuation for today’s market.
