Some were unsurprised by the move, others described it as ‘extraordinary’. Either way, if you have a mortgage, you will want to know exactly what today’s emergency interest rate cut will mean for you and your home.
In case you have yet to catch up, this morning the Bank of England (BoE) has slashed interest rates from 0.75% to 0.25%.
The move was made in a bid to buffer the UK’s economy against the potential impact of the coronavirus crisis. As a result, rates are back to their lowest point in history.
According to Laura Suter, a personal finance analyst at investment firm AJ Bell, this is the first unscheduled interest rate change from BoE since the crisis 12 years ago. Rates are now lower than they were in the financial crisis.
“The cut to 0.25%,” Suter explained, “also leaves minimal ability to slash rates further in the future.”
What makes the cut even more exceptional is that it has happened on the morning of the Budget, just hours before the new Chancellor Rishi Sunak was due to deliver the government’s financial plans.
Andrew Montlake, managing director of mortgage broker, Coreco, said: “For a central bank to cut rates on the morning of a Budget is an extraordinary move that reflects the gravity of the Covid-19 situation unfolding.”
So how will this morning’s events impact your mortgage?
Tracker mortgages
Borrowers who are on a variable or tracker interest rate will benefit almost straight away. Indeed, tracker mortgages, go up and down according to external factors – most commonly the BoE base rate.
Suter said tracker mortgage borrowers will see a ‘near immediate’ effect on their mortgages.
According to figures from online broker, Mojo Mortgages, the base rate cut will mean people who are on a variable or tracker rate mortgage will see a reduction in their mortgage payments of roughly £25 a month per £100,000 of outstanding mortgage balance.
Fixed rate mortgages
If your mortgage is on a fixed-rate basis, you will see no change. There’s a chance new fixed rate deals may be impacted by the BoE rate cut further down the line, but you will only benefit from this if you remortgage or take out a new mortgage to move house.
This may take time and there’s no guarantee mortgage providers will pass on the full rate cut.
If you are remortgaging or about to buy a property
If you are due to remortgage or are sitting on your lender’s standard variable rate (SVR) – this is the default rate you fall onto if you don’t switch to a new product at the end of your deal – today’s cut could still eventually be great opportunity.
Equally, if you are about to buy a house you may also be able to take advantage of even more competitive rates.
Although it might take a while for the rate reduction to filter through to fixed-rate mortgages – some experts think it’s likely to impact pricing at some level.
Rob Griffiths, director of the Mortgage Market Alliance, explained one of the BoE’s motivations when cutting rates as to stimulate the flow of lending out to consumers and businesses. He thinks the market is about to get even more competitive.
“There are likely to be considerable savings available, especially if the borrower is sat on their lender’s Standard Variable Rate,” he said.
However, others are more cautious. Indeed Montlake explained lenders will also need to consider how they will price in the fact their own staff levels could come down and may not be able to cope with the increased demand.
“Lenders will be in a tailspin this morning as they seek to get their heads around this drastic move from the Bank of England,” he said. “We are living in truly unprecedented times.”
Worried about repayments?
Some lenders have announced they will offer payment breaks to customers who are struggling to repay mortgages or loans because of the impact of coronavirus. Royal Bank of Scotland, which includes Nat West, and TSB were the first to offer this reassurance. HSBC and Barclays have also said they may provide similar deferrals.
Industry body, UK Finance, said providers were ready to offer support to their customers who were impacted – directly or indirectly – by coronavirus.
Meanwhile, the Building Societies Association (BSA) which represents the UK’s building societies, said, urged anyone concerned about their ability to pay their mortgage to speak to their lender as early as possible.
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