What interest rates and inflation will mean for your money and mortgage in 2026

Rates were cut by the Bank of England to 3.75 per cent before Christmas - the lowest level in almost three years

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There’s been a flurry of activity in the UK economy over the last week, which will have major implications for the mortgage rates, savings accounts, and the cost-of-living in 2026.

The Bank of England cut interest rates for the fourth time this year on Thursday, bringing the benchmark Bank Rate down to 3.75 per cent, its lowest level since early 2023.

That decision came just a day after new figures showed inflation had fallen faster than many analysts had expected, dropping to 3.2% in November from 3.6 per cent previously. The sharp fall in inflation was largely driven by easing pressures for food and drinks, with prices in these categories actually falling 0.2 per cent month-on-month.

But what does it mean for consumers and households heading into next year, who are trying to plan their finances?

Inflation

Following the figures, many experts were adjusting their forecasts for 2026. “Inflation is fading much faster than everyone thought," said Paul Dales, chief UK economist at Capital Economics, a consultancy firm. Dales predicted that inflation could fall to two per cent as soon as April next year.

Similarly, James Smith, an economist at Dutch bank ING, said he expects headline inflation to fall “pretty close” to two per cent by May.

CPI inflation (light blue) is down to 3.2 per cent (ONS)

Alongside lower price pressures and reduced borrowing costs, forecasters expect wage growth to remain strong, which should mean that workers will see a third consecutive year of real wage increases.

“This combination of easing inflation, steady pay growth, and lower borrowing costs should help improve the cost-of-living picture," Julien Lafargue, Chief Market Strategist at Barclays Private Bank and Wealth Management, said.

Those factors combined have many commentators thinking that the Bank of England could cut interest rates just twice next year.

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Mortgages

Interest rates set the price of borrowing in the economy, and are an important factor for determining the cost of mortgages.

The most recent rate cut will be a boon for mortgage holders, particularly the half a million people on tracker mortgages who will see an immediate reduction in their monthly repayment rate.

For those on fixed-rate deals there won’t be an immediate boost, but the rate reduction will enable lenders to offer better deals to borrowers looking to refinance.

Chris Sykes, co-founder of MSP Financial Solutions, said that although the rate cut was expected by many brokers, it still “cements market expectations so…we might see a small amount of additional margin open up,” which would enable lenders to offer cheaper rates.

(Getty Images/iStockphoto)

“Rates are currently at the best level we’ve seen in a long time, and there is more of an element of market certainty which is excellent,” he added.

The average two-year fixed rate has fallen from 5.48% at the start of the year to 4.86% at the start of December, according to Moneyfacts, while the average five-year fixed rate has dropped from 5.25% to 4.91% over the same period.

Interest rates

How far mortgage rates continue falling in the New Year will depend on how many times the Bank of England cuts interest rates.

Governor Andrew Bailey sounded a more cautious note on the prospect of further rate cuts than many had anticipated, saying “with every cut we make, how much further we go becomes a closer call”.

Still, Simon Gammon, a managing partner at Knight Frank Finance, said it was "not impossible" that there could be sub-three per cent two-year fixes by spring, predicting a “price war” in January.

Sykes agreed. "I’ve heard from a few lenders that they will be coming out strong in 2026," he said.

More broadly Sykes said 2026 would be an “active year” for the mortgage market, with around 1.8m fixed-rate mortgage deals due to end. Many borrowers agreed two-year deals in 2023 and 2024, when interest rates were significantly higher, meaning those refinancing could pay hundreds of pounds a month less.

Around 1.8 million fixed-rate mortgages are due to expire in 2026 (Joe Giddens/PA) (PA Archive)

“Most of the remortgages we are doing now are improving rates taken a couple of years ago, whereas last year, more often than not, we were telling a client how much more their new mortgage cost would be, as they were on a super low pre-covid rate,” he said.

Nevertheless, the Bank of England still estimates that mortgage costs will go up for 43 per cent of households in the next three years, particularly those who agreed five-year deals back in 2020 and 2021.

Savings accounts

Savers will have less to cheer as a result of Thursday’s interest rate reduction, because it will mean they receive lower returns on their savings.

“Returns on cash savings should start to reduce over the coming weeks, while annuity rates, which provide a guaranteed income for life in retirement, might also become less attractive,” Craig Rickman, personal finance expert at interactive investor said.

The average easy-access savings rate was 2.56 per cent, according to Moneyfacts, although market-leading accounts still offer over four per cent.

Limited access accounts, which require savers to lock up their funds for a specific period of time, typically offer better deals.

When investing, your capital is at risk and you may get back less than invested. Past performance doesn’t guarantee future results.