Bank of England Base Rate Cut In August? What Does That Mean To You?
18th July 2016
Whilst the Bank of England announced last week that they were holding rates steady at 0.5%, they have dropped a pretty significant hint that there may be a rate cut in August, most likely to 0.25%.
Although this does remain to be seen as the Governor has a history of twisting and turning, remember the speculation over the past few years that the next move would be upwards and his “At the turn of the year” comments, the situation Post-Brexit vote has changed everything.
In deciding to keep the Bank Base rate at its current historical low of 0.5% rather than cut further as many expected, the Governor has yet again adopted a wait and see approach.
Whilst this may flummox the markets yet again after his recent speech, it was always the case that August was a more likely time to take action after having garnered more economic data after the Brexit decision.
This is all very well, but those with a mortgage as well as prospective borrowers will be asking what this actually means for them in practice, so here we try to answer a few of these questions.
What will be the effect on my current mortgage?
If there is a cut, the immediate benefit of such a cut will be felt by those mortgage borrowers with a tracker product who should see their monthly payments reduce by approximately £11.43 per £100,000 borrowed on an average 25-year repayment mortgage or £20.84 if interest only.
Borrowers should however check the small print of their mortgage product, as some lenders have a “collar” or floor below which they will not reduce rates further. Some other lenders use their own version of Bank Base Rate which, although it always has historically, does not have to mirror the Bank of England.
Similarly, lenders may not be quick to reduce their Standard Variable Rates. Many lenders stopped passing on cuts the last time Base Rate fell further in order to protect their margins and ensure they remain profitable.
What if I am on a Fixed Rate?
On a fixed rate, you will not be effected by any changes to the Bank of England Base Rate and will continue to pay the current rate you are on.
Given the current prevailing conditions we would encourage all borrowers to take professional advice as reviewing their options now could amount to a significant saving in their monthly mortgage payments and there may well be a case now for some borrowers to switch even if they do have Early Repayment Charges.
However careful calculations need to be done taking into account not just the penalties but also the associated fees that may be attached to any new product.
Should I take a Fixed Rate or a Tracker Rate now?
The question of whether it is better to fix or take a tracker always comes down to personal circumstances. For those borrowers who do not want to worry about their mortgage payments at all and like to budget accordingly, a longer term fixed rate does bring added security and at the current low rates I believe these are excellent value now.
A 5-year fix around the 2% level really is exceptional and for those that have no intention of moving within this time period is a great option.
For the first time now, 10 year fixes from just 2.39% are also worthy of consideration. They will be especially attractive to borrowers looking to remortgage who have a good level of equity in their property and have no expectation of moving over that time period. Also those purchasing who have a high deposit on a long term family home or trading down for a last move, will also be tempted by the additional level of security and peace of mind these longer-term fixes bring.
Borrowers do need to pay careful attention to the Early Repayment Charges such rates often come with and need to be aware that if they do need to move within the fixed rate period they will be limited to staying with their existing lender, unless they are willing to pay the penalties.
Whilst the products are generally portable, it is important to understand that portability is not an automatic right and lenders will go through their due diligence and affordability calculations again at the time to check you still meet the required criteria.
It does seem that there has never been a better time to lock in to the relative safety of a longer term fix for those that need additional security.
However, there are still many borrowers who want a little more flexibility and do not want to be tied in further than two years. A tracker option looks especially tempting especially when there could be further rate cuts, but you have to bear in mind that, whilst unlikely at present, rates could also rise and you should be able to cope with that if it happens.
Another option is to take a lifetime tracker rate product that often comes with no Early Redemption Charges at all, especially for those who want to pay off lump sums over the course of the loan. Tis also gives you the flexibility to jump into a fixed rate at any time if current circumstances change.
I am a First Time Buyer, or contemplating moving house, should I move fast to get a good deal or wait?
Whilst it is always tempting to try to predict the market, it is often not as simple as it seems and borrowers should always do what is suitable for them now rather than risking the future.
It always pays to lock in to a competitive deal as quickly as possible, especially for those looking at a tracker product as some lenders have already increased their tracker rates in anticipation of cuts. We expect more lenders to increase these going forward.
As far as fixed rates are concerned, Swap Rates have fallen dramatically since the Brexit vote so have to some extent already priced in a cut such as this.
That said, the continued competitive pressure between lenders will ensure that the current crop of low rates continue for the foreseeable future and we may well see some even lower offerings over the coming weeks, although we do seem to be getting towards a point where lenders will be loath to cut any further.
I am still renting; what effect does it have on me?
For renters a base rate cut may encourage more to investigate the possibility of buying their own property given the fact that in many cases, low mortgage rates mean that the monthly cost of a mortgage is cheaper than monthly rent.
The issue is that first time buyers still need to find substantial deposits with house prices still at their current levels and lower interest rates do not help those saving diligently for a deposit.
Although we are living through uncertain times, life goes on and the underlying reasons for purchasing a home are unchanged, whether it be to move out of home, start or grow a family, get into a school catchment area, or move due to divorce or work so demand for property will continue.
We all need to remember that property is a long term thing and buying a home is not a short-term investment.
The good news is that banks are much better capitalised and having repaired their balance sheets over the past few years will still be in the business of looking to lend, so for the most part there is no reason to think that it will not be business as usual.
When all is said and done, we may look back at this period and see it as a fantastic opportunity for buyers and especially those looking to Remortgage to take advantage of some highly attractive mortgage rates.
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Andrew Montlake, Director and Spokesperson for Coreco, gives his honest and forthright views on the mortgage market, economy and all things property related. Monty was voted "Mortgage Personality of the year 2008", "Best Press Spokesperson" in 2011 and is the current holder of the British Mortgage Awards “Best Marketeer” title. Expect expert analysis, delivered in a down to earth style with a side helping of exuberance.