The Bank of England has cut interest rates to 4% in a move which will lower some people’s mortgages and could give first-time buyers a boost.
An interest rate cut is always positive for homeowners as it means the cost of borrowing is lower. However, with today’s cut considered a certainty by the markets, most mortgage lenders had already factored this into their pricing.
Indeed, fixed rate mortgage prices have been falling for some time and data out today from Moneyfactscompare.co.uk showed a typical two-year fixed rate was now 5% compared to 5.77% in August last year and 5.09% last month.
The decision by the Bank of England (BoE) to reduce the Base Rate and trigger a 0.25% cut from 4.25% to 4% was not taken lightly. Indeed, the nine member committee – the Monetary Policy Committee (MPC) – voted five to four in favour of the cut.
The four who were against a cut, wanted to maintain the Base Rate at 4.25%. Interestingly, one of the five members who voted for a cut said voted for a 0.5% reduction.
The reason for the close split was down to inflation. Currently it is much higher at 3.6% than the 2% target. Keeping interest rates higher when inflation is also high is more advantageous to the economy.
Alice Haine, Personal Finance Analyst at Bestinvest by Evelyn Partners, the online investment platform, said the split vote highlighted the ‘delicate balancing act of supporting growth and containing inflation’.
“Consumer price inflation rose to 3.6% in the 12 months to June – almost double the BoE’s target of 2% – a likely reason why four committee members voted to hold rates steady at 4.25%.
“But with demand for workers softening, wage growth easing, economic output stagnating and lingering global headwinds, the Bank of England appears to be looking past inflation to prioritise growth.”
What does a cut to interest rates mean for your mortgage?
The big question for anyone with a mortgage is how today’s interest rate cut will impact their mortgage deal.
Here’s how things stand, depending on your homeowning status or type of mortgage:
If you’re on a tracker or variable mortgage…
Good news for tracker mortgage borrowers is today’s rate cut will mean your deal will be cut accordingly. This should happen almost immediately, but some lenders can take longer.
Those on variable rates should also see an adjustment, although this can take longer to filter through.
If you’re on a fixed rate mortgage…
If you are currently locked into a fixed rate mortgage, you will see no changes. If you are due to remortgage in the next six months, it could be worth looking out for a new deal now and keeping your ear to the ground.
Although there is another cut predicted to take place by the end of the year – nothing is set in stone. It could be a good idea, therefore, to speak to a mortgage broker.
If you are coming off a two-year fix you will find mortgage rates have fallen quite considerably since you signed up to your current deal. Your repayments should now be lower.
However, if you are coming off a five-year fix, secured during the property boom and ultra-low rate environment of pandemic, you are likely to face higher rates now.
If you’re looking for a new mortgage deal…
Whether you are buying your first home, remortgaging or moving home today’s rate cut won’t make much difference if you are looking for a fixed rate deal.
Lenders have already been pricing today’s cut into their mortgage rates and, as such, pricings have been falling in the last few weeks and months.
Nicholas Mendes, mortgage technical manager at John Charcol, said: “Mortgage rates have been edging lower in recent weeks, helped by falling swap rates and a fresh price war among lenders.
“Many banks are off their annual targets, particularly on the purchase side, so they’re sharpening rates to compete for remortgage business instead. That’s why we’ve started to see a handful of five- and two-year fixed rates priced below 3.8%, even as inflation remains above target.
“For the hundreds of thousands of borrowers rolling off sub-2% pandemic-era deals this year, the gap between old and new repayments is still significant, but it’s narrowing. The payment shock is nowhere near what we were seeing 12 to 18 months ago.
“Whether now is the right time to fix is down to personal circumstances. Two- and five-year deals are very closely priced, some borrowers want flexibility if rates fall again, while others prefer the certainty of locking in for longer. It’s less about timing the market and more about what fits your plans.”
If you are a first-time buyer…
It’s a slightly better time to be a first-time buyer now than it has in previous years. With lenders offering better affordability calculations and interest rates falling, the challenges are certainly easing.
However, high house prices and inflation are still creating hurdles as are increased stamp duty charges which impact buyers in areas with expensive homes.
Ben Thompson, Deputy CEO, Mortgage Advice Bureau, thinks today’s rate cut will certainly be welcome to those stepping onto the property ladder.
“The Bank of England’s latest rate reduction will provide even more incentive for aspiring homeowners to step onto the property ladder,” he said.
“It was already a good time to buy, but this latest move makes it even more attractive. Lenders are continually adjusting their criteria, and it’s increasingly possible to borrow more than you could last year, opening up the mortgage market significantly.”
Will there be another interest rate cut this year?
The big question after today’s decision is will there be another cut before the year is out?
Mendes said: “Markets [are] pricing in one or two more cuts before the end of the year. If inflation behaves, the base rate could fall to 3.5% by early 2026, but the Bank has made it clear it won’t rush.”
He added: “For now, the direction of travel seems downward, but not dramatically so. If things go to plan, we could see some of the best deals reach the low threes next year, particularly for borrowers with large deposits or equity. But that’s not locked in.
“Forecasting rates is difficult in this environment and flexibility still matters.”
Meanwhile, Alice Haine warned, whilst borrowing costs were lowering, consumers should still remain watchful.
“While the BoE maintains a cautious stance on further rate cuts amid lingering inflationary pressures,” she said, “consumers should approach the improving borrowing landscape with care.
“Lower interest rates are not a green light to splurge, rack up new debt or stretch mortgages to the max possible.
“With uncertainty still clouding the broader economic outlook and the Autumn Budget looming – and with that the potential for further tax rises – households would be wise to bolster emergency funds and avoid heavy borrowing to ensure their financial resilience can weather any further storms.”
