The Bank of England has announced a cut in interest rates from 0.5% to 0.25%.
This is a record low and the first cut since 2009. The Bank of England Governor, Mark Carney indicated that there could be a further cut if the economy worsens.
Generally an interest rate cut is good for borrowers and typically those with a mortgage and not so good for savers.
Mortgages
As you’d expect a mortgage is typically the biggest debt that a household will have. An estimated 11.1 million households have one. The typical amount still left to pay on each home loan in the UK is £116,000, according to the Council for Mortgage Lenders.
Using Office for National Statistics (ONS) house price data, a cut to 0.25% means a £22 monthly reduction in the bill for a variable 25-year repayment mortgage on a typically priced home of £211,000 having taken a 20% deposit into account.
So that is a £22 cut on a monthly mortgage bill of about £779.
Founder and CEO of eMoov.co.uk, Russell Quirk, commented:
“Today’s cut in interest rates will come as welcome news to UK homebuyers who will continue to enjoy rock-bottom mortgage rates as a result of this latest cut.
The Brexit result brought about sensationalist prophecies of a less stable housing market and, as a result, many would have been deterred from buying. However, today’s news should come as a reassurance that the UK property market is in a more than stable condition.
A cut in interest rates is the antidote for the post-Brexit worry and will, as a consequence, ensure that the UK economy continues to be underpinned by buoyant property prices.”
Ben Madden, managing director of London estate agents Thorgills, said:
“The first rate cut for seven years can only be a positive for the UK property market. For many homeowners, their mortgage costs have just fallen even further.
“The property market has by no means imploded since the vote to leave the EU but the decision to cut rates further, and also print more money, should inject additional confidence into UK bricks and mortar.
“Alongside the underlying supply crisis, this could see house prices hold firm for the foreseeable future, particularly in areas outside prime central London.
“Long-term low interest rates have undoubtedly boosted demand in the property market, putting upward pressure on house prices. This new rate cut almost certainly won’t send prices up, but it could certainly help to stabilise them.
“Sadly, while homeowners and many in the property market will benefit, the Bank of England’s decision will hit savers hard once again.”
You can see the official base rate history here:
Mortgage deals may get marginally better but not necessarily
Low rates support mortgage lending and will continue to do so. The Bank of England wants lenders to pass on the benefits of a lower base rate to consumers. To encourage this, it has a £100bn fund called the Term Funding Scheme (TFS) which will lend to banks at rates near to the new base rate. But there is no guarantee banks will pass on such lower costs. Or even be able to.
The mortgage market is already hyper-competitive. Lenders are probably offering more deals and discounts than they ever have, with super-low interest rates on many mortgage products. How much lower can they go before things become unprofitable, or too risky? The Council of Mortgage Lenders (CML) noted that since the last rate cut in March 2009, the average mortgage rate has fallen from 3.8% to 2.9%. But this is impacted by all sorts of factors, not just the base rate, such as bank funding costs, competition, and risk, among other variables. The CML said it “follows that a rate cut does not automatically feed through on a like-for-like basis to mortgage rates. Future pricing will depend on all the factors above and is a matter for individual lenders.”
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