In a shock turnaround, the Bank of England announced on March 11th, 2020, that they have reduced interest rates from 0.75% to 0.25%. With so much economical uncertainty and change, you probably want to know what this means for you and your mortgage in real terms.
How does the base rate affect my mortgage?
The base rate is essentially what the Bank of England (BOE) charges other banks and lenders when they borrow money.
In a bid to “Bolster the cash flow of businesses and improve the availability of finance”, the BOE made the decision to reduce the base rate by 0.5%. For base-rate tracker mortgage customers who pay interest on their mortgage in line with the base rate, this could be good news.
For fixed rate mortgage customers and savers...not so much.
If I have a base-rate tracker mortgage will my repayments go down?
If you have a base-rate tracker mortgage, the interest you pay on your loan may decrease, potentially saving you money.
Hypothetically, if you had a £200,000 tracker mortgage over 25 years, paying 2% interest on a repayment basis, the monthly cost would be £848.
The interest you pay on a base-rate tracker mortgage is directly affected by a change to the base rate. So if your current interest rate is 2% and it drops to 1.5% after the cut, your monthly repayments would be reduced to £800 a month. If rates were to remain low, you could make an annual saving of £576.
If I have a fixed rate mortgage, will I save money?
According to the FCA, 9/10 mortgages have a fixed rate in the UK, meaning that for the majority of mortgage customers, the Bank of England’s base rate cut changes won’t have a financial impact.
This type of mortgage agreement requires borrowers to pay interest on their mortgage at a previously agreed fixed rate, for a fixed amount of time (usually 1 - 5 years.)
That means that if you’ve got a fixed rate mortgage, your mortgage repayments stay the same until that fixed rate period ends.
Lenders usually charge higher rates of interest to their customers once the fixed rate period is over, which is why some borrowers remortgage elsewhere with the help of a broker. You can learn more about this in our remortgaging guide.
Will it be harder to save now that interest rates have been cut?
The emergency 0.5% rate cut by the Bank of England won’t have an affect on tracker or fixed rate mortgage customers but could halt homeownership for many potential first time buyers currently trying to save.
Savings rates have decreased throughout 2020 already, stretching the homeownership process for many borrowers in the midst of saving a deposit. Interest rates on savings accounts are likely to take a further hit after the news of the BOE’s decision to cut the base rate.
The good news is that there are a selection of lenders that accept smaller deposits and with the help of an experienced broker, it may be possible to find a financially viable route to homeownership for you.
Is borrowing cheaper now that interest rates are lower?
The Bank of England’s decision to reduce interest rates by 0.5% has a direct effect on borrowing, which, for the time being, could be cheaper depending on your circumstances.
What you need to know:
The interest rate a lender may offer you on a mortgage can be affected by many factors, including the base rate. Your own circumstances will also affect the rate you’re charged on a mortgage or loan.
Usually, the higher the risk of default, the higher the interest rate, so applicants with a less than perfect credit score, for example, may be charged a higher level of interest.
However, with interest rates on mortgages predicted to decrease, borrowers could access affordable mortgage deals.
If I have to take time off because of Covid-19, can I defer my mortgage?
Some lenders have announced that they will allow their mortgage customers to defer their repayments. With 20% of the workforce predicted to be affected by the virus, some lenders have made the decision to allow their mortgages customers to defer their repayments, up to six months in some cases. This could help many mortgage customers avoid accumulating debt and damaging their credit score.
If you’re wondering if you can defer your mortgage because of the Coronavirus, check with your lender and don’t delay any mortgage payments until you have written confirmation that you can do so.
Ask us about how Coronavirus could affect your mortgage
Uncertainty about your mortgage or your ability to get a mortgage because of the base rate cut changes can be worrying but with the right advice, you can make an educated decision about your best options.
For tailored advice related directly to your mortgage and circumstances, send your questions to our team.