The long-expected UK interest rate cut – the first since 2009 – became a reality last week. The base rate now stands at 0.25%, a record low. Although the Bank of England was wary of acting too hastily in the wake of the shock Brexit vote, it was clear a cut was on the cards to offset the shock to the economy. How you feel about it will depend on whether you sit on the saving or borrowing side of the fence.
While the cut effectively pours salt in the wound for savers, hundreds of thousands of borrowers will see a reduction in their monthly mortgage payments. Those who are already on a tracker product will see the benefits straight away, as lenders are obliged to shift rates up or down in line with the base rate. For instance, if you had a £200,000 tracker mortgage on an interest only basis, your monthly payments pre-cut would have been £416; post-cut, this will drop to £375.
Those on a variable rate can also expect to see a reduction; although there may be a slight delay, the governor of the Bank of England made it clear he expected lenders to reflect the interest rate cut in their pricing. Mark Carney insisted banks will have ‘no excuse’ not to pass on the lower borrowing costs to customers, and may face penalty charges if they fail to do so. ‘The MPC [Monetary Policy Committee] is determined that the stimulus the economy needs does not get diluted as it passes through the financial system,’ he said.
Of course, not everyone will find their monthly payments dropping, as some lenders have a ‘collar’ below which they won’t lend; check the small print, or get in touch with a mortgage adviser, to discuss the implications of the cut for you.
Given Carney’s suggestion that rates could fall even further if the economy deteriorates, does this mean borrowers should be holding out for even better rates?
‘As most lenders have already priced in an interest rate cut, I wouldn’t expect to see huge changes in advertised rates,’ says Islay Robinson, CEO of Enness Private Clients. ‘If you’re looking for a new mortgage, don’t hold off in the hope of seeing huge drops. Over the past couple of weeks, we’ve actually seen lenders increase their margins on variable rate products in anticipation of this cut.’
The low cost of borrowing could place some light upward pressure on house prices as more and more people are encouraged to take out mortgages. Anyone who can raise a large enough deposit will be able to take advantage of a range of deals, including fixed rate mortgages still hovering at historic lows.
Now, all eyes turn to the Chancellor’s Autumn Statement. Carney has done his bit, and it will be down to Philip Hammond to back up the Bank of England’s monetary policy in a couple of months’ time.
If you have any questions about what the interest rate cut means for you, please do get in touch. Our expert brokers are on hand to help day and night.