Does the Bank of England’s interest rate cut mean lower mortgages?
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Version 0 of 1. What the decision means for homeowners – and the implications for savings, loans and credit cards The Bank of England has cut the cost of borrowing, reducing headline interest rates from 5% to 4.75% – a move that was widely anticipated. It is the second interest rate cut this year. Will my mortgage get cheaper? For the majority of people, the answer is no. That’s because almost 7m of the UK’s 8.4m existing residential mortgages are on a fixed rate, so 82% of people with a home loan won’t see any change. However, some of these fixed-rate mortgage-holders will need to consider their options over the next few months because their current deal is coming to an end. This week’s cut should translate into lower borrowing costs for the 629,000 homeowners with a base rate tracker mortgage, and also the 693,000 borrowers whose monthly payments are linked to their lender’s standard variable rate (SVR). Only the tracker mortgage customers are guaranteed to see their payments go down. Although it is likely that lenders will reduce their SVRs, they are not obliged to do so and could choose to keep the rate as it is or pass on only some of the cut. For a tracker borrower paying 6.44% (the average current tracker rate, according to the banking body UK Finance), a 0.25-percentage point cut to 6.19% would knock £22 a month off a £150,000 repayment mortgage with 20 years remaining, taking the monthly payment down from £1,113 to £1,091. The average SVR now is 7.95%, according to the financial data provider Moneyfacts, so if the full cut is passed on to someone on that rate, that would mean monthly repayments for the above mortgage example will drop by £23 – from £1,250 to £1,227. That said, many people sitting on an SVR have smaller mortgages. Further interest rate reductions next year look almost certain, though the Bank of England is expected to dial things back a bit in terms of future cuts after the budget. The Bank’s next two interest rate announcements are on 19 December and 6 February. How about new home loan deals? Fixed-rate mortgages – where what you pay is guaranteed for a set period, typically two or five years – are predominantly priced based on what the money markets think will happen to interest rates, rather than the current base rate. However, the budget shifted UK interest rate expectations a bit, which has – along with the extra frisson added by the US election result – injected some volatility into the pricing of new fixed-rate deals, which had been coming down in cost. Expectations that interest rates may end up staying a little higher for longer than previously expected prompted some lenders to increase the cost of some of their new fixed deals this week, though there have also been some rate reductions. Moneyfacts said on Thursday that the average new two-year fixed-rate mortgage deal had nudged up slightly to 5.42%, while the average five-year deal had ticked up to 5.13%. After Thursday’s move by the Bank of England, and with the dust settling after the budget and US drama, some mortgage brokers are confident lenders will trim the cost of their new fixed-rate deals over the next few weeks – but others are not ruling out higher rates on new products. Nicholas Mendes, the mortgage technical manager at the broker John Charcol, said: “I expect mortgage rates to resume their downward trend before the end of the year, likely returning to the best rates we’ve seen recently, with further improvements anticipated into next year. However, borrowers should keep in mind that current fixed mortgage rates already reflect some of the anticipated bank rate cuts over the coming year. As a result, I foresee the lowest fixed rates stabilising around the low 3% range next year.” By contrast, Peter Stimson, head of product at MPowered Mortgages, said anyone hoping the Bank’s decision would instantly open the floodgates to cheaper mortgages “is likely to be disappointed,” adding: “In fact, the mortgage rates offered to new borrowers and remortgagers could even increase in coming weeks.” Sign up to Business Today Get set for the working day – we'll point you to all the business news and analysis you need every morning after newsletter promotion If you have a fixed deal ending in perhaps four or five months’ time, and you will be looking for a new fix, be aware that remortgage offers are typically valid for up to six months, so you could reserve a loan now and wait to see what happens. Some borrowers will be eyeing up a base rate tracker mortgage in order to take advantage of the expected further interest rate cuts. However, most people are still opting for a fixed deal as right now these are typically cheaper than base-rate trackers, said David Hollingworth, the associate director at broker L&C Mortgages. A fixed deal also offers you payment certainty. So this is bad news for savers, isn’t it? As with mortgage rates, the returns on savings are generally not entirely tied to the Bank of England base rate, but Thursday’s reduction is likely to be passed on to many savers who have easy-access accounts and others who do not have guaranteed interest rates. Many savings rates have come down recently: for example, late last month, National Savings and Investments (NS&I) announced it was cutting the rates on some of its best-known products. However, the budget fallout has had a knock-on effect and that, plus competition among challenger banks for savers’ cash, prompted several providers to increase rates on some products this week. On Thursday it was possible to pick up a fixed-rate savings account paying as much as 5% from the likes of the app-based Atom Bank, provided you were happy to sign up to a short (six-month) term. The top-paying easy access accounts are also paying up to 5%, but those deals may not hang around for long. What about personal loans and credit cards? Most personal loan rates are fixed, so if you are already borrowing money in this way, you will continue to pay interest at the rate at which you originally signed up. New borrowing could come down in price, but rates are unlikely to fall significantly. Credit card rates went up in recent years as the base rate increased. However, they are not explicitly linked to the base rate, so providers will not be obliged to pass on cuts. |