How the Recent Interest Rate Cut Affects Your Mortgage.
Now that the news has settled in and lenders are responding, let's have a look at how The Bank of England’s recent interest rate cut to 5% is affecting your mortgages.
After holding interest rates at 5.25% for seven consecutive meetings, this is the first rate cut since March 2020, when the UK first entered Covid lockdown. Which seems like a life-time ago now!
Understanding Interest Rates and Their Impact
Interest rates are essentially the cost of borrowing money or the reward for saving it. The Bank of England's base rate is one factor that influences what other lenders charge for loans, including mortgages, and the interest they offer on savings. When the Bank of England adjusts this rate, it’s typically in response to inflation — the rise in prices over time.
While this reduction offers some relief, borrowing costs remain high, impacting millions of mortgage holders across the UK.
When inflation is high, the Bank raises interest rates to discourage spending, which helps to reduce demand and, in turn, slow down price increases. Conversely, when inflation begins to fall, the Bank may lower interest rates to encourage borrowing and spending, stimulating the economy.
What does the rate cut mean for you?
With the recent cut to 5%, there are immediate implications for mortgage holders:
Tracker Mortgages: These mortgages directly follow the Bank of England’s base rate. If you have a tracker mortgage, your monthly payments will decrease slightly.
Standard Variable Rate (SVR) Mortgages: These are set by lenders and can change at their discretion but a cut in Bank of England’s base rate can lead to reductions with lenders SVR’s.
Although it’s important to note that fixed-rate mortgages — which over 80% of mortgage customers currently have — won’t see an immediate change in payments, if you’re nearing the end of a fixed-rate period, any new deal you secure may reflect the current market’s reducing rates.
What’s next for interest rates?
There’s no doubt the recent rate cut is a positive sign, but predicting future rate movements is tricky business. Inflation in the UK has come down from its peak of 11.1% in October 2022, but it remains above the Bank's 2% target. Some sectors, particularly services, are still experiencing significant price rises, which means the Bank of England must tread carefully and we are unlikely to see dramatic reductions in the rates anytime soon.
And whilst it’s impossible to know for sure, experts don’t predict an increase in rates in the near future, and even a small drop in interest rates makes a big difference to your mortgage repayments!
Preparing for the Future
If you’re one of the 1.6 million homeowners with a mortgage deal expiring in 2024 or the first half of 2025, now is the time to review your options. Here are some steps you can take to prepare:
Review Your Current Mortgage: If your deal is ending soon, start researching what rates are available. Consider locking in a new rate early to avoid further increases.
Consult a Mortgage Broker: A broker can help you navigate the complexities of the current market, ensuring you find a deal that best suits your financial situation.
Budget for Higher Costs: If you’re moving from a lower fixed rate to a new, higher one, your monthly payments will increase. Plan your budget accordingly to avoid any financial strain. If you feel it’ll be quite a stretch, speak to one of our mortgage specialists who’ll be able to look at your options and see if there’s anything that can be done to keep your home repayments affordable.
