Interest rates were cut four times this year, with base rate falling from 4.75 per cent to 3.75 per cent.

This was good news for homeowners with mortgages, who saw the average two-year fixed rate decrease from 5.52 per cent in January to 4.82 per cent in December according to rates scrutineer Moneyfacts. 

Five-year fixes saw a slightly less dramatic fall, going from 5.3 per cent to 4.9 per cent. 

It is a far cry from the summer of 2023, when they peaked at 6.86 per cent and 6.37 per cent respectively - but homeowners who need to remortgage next year will be hoping that they fall further. 

Where do things go from here, and what factors will influence interest rates and mortgages in 2026?  

Inflation, growth and jobs 

The expectation is that interest rates will continue to fall further next year. This is partly because inflation is predicted to ease off. 

The Bank of England uses interest rate rises as a lever to curb borrowing and spending when inflation gets too high, so when inflation is falling, this gives it headroom to reduce rates. 

Currently at 3.2 per cent, the CPI rate of inflation is expected to average about 2.5 per cent next year, according to the Office for Budget Responsibility (OBR), before returning to the Bank’s 2 per cent target in 2027.

The central bank will also be keeping a close eye on economic growth and unemployment next year. 

When growth is sluggish and unemployment high, the bank can use interest rate cuts to encourage investment and hiring, as it makes borrowing - and therefore the cost of doing business - cheaper.

GDP (Gross domestic product), the most commonly used measure of economic growth, surprised to the downside in September, with a 0.1 per cent month-on-month contraction.

Unemployment is perhaps even more concerning. The latest data from the Office for National Statistics (ONS) shows unemployment has risen from 4.1 per cent in August 2024 to 5.1 per cent as of October this year, the sharpest rise in joblessness in several years.

Financial markets are now forecasting the central bank will cut rates once or twice next year to either 3.25 per cent or 3.5 per cent.

However, each economist and big financial institution has their own independent forecast - and some don't follow the consensus. 

Here are four of the most important ones. 

Capital Economics

Interest rates to end next year at 3% 

Economists at Capital Economics think the Bank of England's monetary policy committee (MPC) will cut interest rates to 3 per cent in 2026 rather than to the 3.5 per cent priced into the financial markets. 

It is forecasting that inflation will fall to the Bank of England's 2 per cent target by the end of 2026, which would be a bigger and faster fall than expected. 

Meanwhile, it is expecting a further rise in the unemployment rate to a peak of 5.2 per cent in early 2026, which it says will contribute to a further easing in wage growth, adding to the downward pressure on services inflation. 

It argues that if labour costs aren't rising as fast, then businesses don't need to raise their selling prices as fast to make the same profits. 

It is also forecasting the economy to grow by only 1 per cent in 2026, which may prevent a widening in businesses' profit margins. 

Morgan Stanley

Interest rates to end next year at 3%

Morgan Stanley correctly predicted the December base rate cut, all the way down to the precise 5:4 split in the vote.

The US investment bank is expecting a further decline in underlying inflationary pressures, and a pick-up in the jobless rate. It also thinks the Bank of England will reduce its near-term inflation forecasts in February next year.

Its economists think the Bank of England will deliver three more rate cuts in the first half of 2026, first in February, then in April and finally in June.

The bank sees interest rates going no lower than 3 per cent, though, expecting them to stay there through 2026 and 2027. 

Bruna Skarica, chief UK economist at Morgan Stanley says: 'The extent of further reductions will depend on the evolution of the outlook for inflation. 

'If progress on disinflation continues, base rate is likely to continue on a gradual downward path.'

Oxford Economics

Interest rates to end next year at 3.25% 

Economists at Oxford Economics think the MPC will cut twice in 2026, first in April and then in November.

In the minutes from the Bank of England's final meeting of the year, it said that 'judgements around further policy easing will become a closer call'. 

Oxford Economics thinks this suggests the December rate cut is unlikely to be the start of a rapid series of reductions.

'We expect base rate will end 2026 at 3.25 per cent,' said Andrew Goodwin, chief UK economist at Oxford Economics.

'The MPC emphasised that while further cuts are likely, they will continue to adopt a cautious approach. 

'Though risks that inflation stays persistently high have receded in recent months, most of the committee are worried about the strength of expectations for 2026 pay awards.'

Barclays 

Interest rates to end next year at 3.5%

Barclays also correctly forecast the outcome of the December base rate decision. 

However, with inflation still running above target, economists at Barclays think the central bank will be cautious about cutting further next year. 

Jack Meaning, chief UK economist at Barclays said: 'As base rate is approaching neutral, we think the MPC will have a higher bar for further cuts but, based on our current outlook, conditions should validate one more 25 basis points cut in March 2026.

What next for mortgage rates in 2026?

There are 1.8million households who must renew their mortgage deals next year, according to UK Finance.

Those coming off two-year fixes are likely to save money, given the best rates were around 4.75 per cent two years ago when they last fixed.

However, those coming to the end of five-year fixes will be coming off mortgage rates between 1 and 2 per cent, taken at a time when interest rates were at rock bottom.

Now, they face the prospect of remortgaging to a rate of around 3.5 per cent or more, or reverting to standard variable rates that can be higher than 7 per cent.

Lenders usually base their mortgage pricing on the longer-term trajectory of interest rates, rather than reacting to individual base rate decisions. 

But the good news is that banks have been locked in a fierce mortgage price war in recent months, with the lowest rates on the brink of falling below 3.5 per cent for the first time in three years.

The lowest two-year fix is currently 3.51 per cent and the lowest five-year fix is now 3.74 per cent. 

If interest rates only fall to 3.5 per cent next year, this is unlikely to have much impact on fixed mortgage rates as the cheapest deals are already at a similar level. 

There is even a chance rates could go up slightly.  

Chris Sykes, property finance specialist at mortgage broker MSP Financial Solutions, says: 'We may even see some slight increases, as we already have some interest rates very close to 3.5 per cent, and if that is where base settles long term then rates so close to base are not sustainable for the long term.' 

If interest rates are cut to 3 per cent during the course of next year, this should be enough to move the dial lower on mortgage rates.

Sykes says: 'If we see rates continue to fall and base settle around the 3 per cent mark then there is still room for rates to continue to move downwards - although it might be the back end of next year that we see this.

'Mortgage pricing won't just depend on where base rate sits, though - lenders will price based on future expectations. 

'This is why currently five-year fixed rates are more expensive than two-year fixed rates again - as it is uncertain what the longer term will hold at the moment.'

How long should you fix your mortgage for?

Some of those who need to take out a new mortgage in 2026 will opt for a two-year fix, hoping that interest rates will fall over the next couple of years and they can get an even cheaper deal in 2028.

Others will fix for five year deals, which come with marginally higher rates but provide certainty over monthly payments for the next five years. It is not inconceivable that interest rates could start to rise again during that time.

'If you want long-term security, a five-year fixed might be best for a borrower,' says Sykes.

'If you expect rates to continue to fall towards the more optimistic predictions, then a two-year fixed might be best.'

Those confident rates will fall to 3 per cent or lower may also want to consider trying their luck with a tracker mortgage.

Trackers follow the Bank of England’s base rate, plus a set percentage.

For example, someone could be paying base rate plus 0.5 per cent with a tracker. With the base rate at 3.75 per cent, they’d pay 4.25 per cent at present.

But if the base rate fell to 3 per cent, their rate would fall to 3.5 per cent.

Tracker deals is that they typically don’t come with early repayment charges, so borrowers can switch to a fixed deal when they feel it’s the right time.

Halifax currently offers a two-year tracker deal at 3.86 per cent (base rate plus 0.11 per cent) for those remortgaging with 40 per cent equity or more in their home. 

The deal does come with a £1,499 fee, so it’s important to factor that into any calculations.

Someone with a £200,000 mortgage and a 25-year repayment term would expect to be paying £1,068 a month with Halifax to start with.

But of course, were interest rates to fall to 3 per cent by the end of next year, the interest rate would fall to 3.11 per cent and monthly payments to £959.

However, there is no guarantee that rates will continue to fall and there’s a risk they could rise if there are any unexpected market changes.

Sykes adds: 'Trackers haven't been very attractive lately as fixed rates have been the cheaper option, but as base gets towards its final resting place we could see more people opt for tracker rates if their expectation is for base to continue to fall.

'If optimistic and happy to accept some level of risk, then a tracker might be the most advantageous product for a borrower. 

'We are seeing tracker rate margins at some of the lowest we've seen in a long time currently - I just secured a tracker for a client at 0.11 per cent over base rate.'