The Bank of England has cut interest rates to an all-time low of just 0.25 per cent. This is the lowest rate in the history of the British economy and the first change to the rate we have seen in more than seven years. It comes in the wake of a post-Brexit economic fallout, which has seen some house prices fall and early signs of a recession start to show.
Being hailed as an ‘antidote to post-Brexit damage’, the cut comes in the wake of the news that the UK’s economy is shrinking at the fastest rate since the crash in 2008. The cut is worth around £170bn to the economy.
Predictions are that this will mean good news for homeowners, for businesses looking to borrow funds and for pensions that are invested in shares and bonds. It could be not such a good move if you’re a money saver, if you are planning to take a holiday (as the pound is weakening) or if you have a company pension.
What Does It Mean For Mortgages?
If you’re borrowing on a fixed rate mortgage, this change really doesn’t mean anything much to you. Around 50 per cent of current mortgages are fixed deals, so an awful lot of borrowers will be rather nonplussed by the decision. However, if you’re borrowing on a variable mortgage, it could mean very good news.
Around 1.5 million homeowners currently track the base rate of interest, and for these borrowers they are going to be quids in. Monthly repayments will fall, probably starting in September, and the borrower will have a little more cash in their pocket each month. For example a borrower with a £150,000 Nationwide mortgage could see their repayments cut from £673 a month to £654.
Some borrowers will do much better out of this news than others. Although there are no longer any sub base rate mortgage trackers active in the UK, some savvy consumers managed to bag a bargain a few years back, and will be even better off next month. Borrowers from the Chesham Building Society who secured a lifetime tracker were already paying just 0.09 per cent over the Bank of England base rate, and will now be paying just 0.34 per cent interest on their remaining mortgages.
So What About Variable Mortgages?
If you, along with around 3.5 million others, are currently on a standard variable mortgage, it will be up to your lender as to when and how they pass on these cuts. However, the governor of the Bank of England has made it clear that he fully expects them to pass on these cuts in good time, saying that the banks had ‘no excuse… not to pass on this bank rate’.
Despite this, both NatWest bank and Lloyds bank, who incidentally have both been bailed out by the taxpayers fairly recently, admitted they did not have any firm plans for passing on this cut right away. Currently around 17 per cent of NatWest’s mortgage customers are still on variable rates of 4 per cent, and around 33 per cent of Lloyds customers are paying 3.99 per cent interest.
In short, it’s not a forgone conclusion that you will benefit from this interest rate cut at all. Some lenders have a threshold, below which they will not reduce their rate any further. Others may typically mirror the Bank of England base rate, but might decide to delay or postpone any cuts for the time being.
Good News For First Time Buyers?
Sadly, not necessarily. While a reduction in the interest rate may mean that mortgages become more affordable, it doesn’t necessarily follow that it will be any easier for first time buyers to secure a mortgage in the first place. House ownership is still beyond the reach of many first time buyers, thanks to excessive prices and a shortage of entry level properties.
How To Find Out If You’ll Benefit
The Telegraph has put together a useful table detailing lenders responses to the cut. If you’re not sure whether you should be expecting a reduction or not, check the small print on your mortgage agreement and speak to your lender in person for one to one advice.
If you would like to explore whether remortgaging may be beneficial to you, contact me for a chat about your circumstances and to see whether you could take advantage of falling interest rates.