We take a look at the impact the Bank of England’s latest rate reduction will have on mortgages.
The Bank of England has slashed interest rates to a record low of 0.1% in its second emergency reduction in just over a week.
The cut from 0.25%, which was made in response to the coronavirus pandemic, leaves the base rate at its lowest level in the Bank’s 325-year history.
The move triggers an automatic mortgage rate reduction for homeowners on tracker rates, as well as some standard variable rate customers.
Who benefits from the mortgage rate reduction?
People with tracker mortgages, which move up and down in line with the base rate, should automatically benefit from both yesterday’s 0.15% reduction and last week’s 0.5% one.
But some lenders do have so-called floors, caps and collars on their tracker deals, meaning that the rate homeowners are charged will not fall below a certain level.
People on standard variable rates (SVR) - the rate homeowners are automatically moved to when a fixed-term deal comes to an end - could also benefit. But, unlike tracker mortgages, lenders have more discretion over whether they cut these rates.
So far, 14 lenders have passed on the 0.5% base rate reduction in full to their SVR customers, but no-one has yet announced if they are cutting rates by a further 0.15%.
How much will homeowners and first-time buyers save?
The cumulative 0.65% reduction to the base rate will save someone with a £100,000 mortgage £650 a year if lenders pass it on in full.
Homeowners who have a bigger £250,000 home loan will save more than £1,625 a year.
Will fixed rate mortgages be lowered?
As their name implies, fixed rate mortgages do not move up and down in line with the base rate but remain the same for the duration of the deal, so existing customers will not benefit.
Whether or not new customers see a reduction in the cost of fixed rate mortgages that lenders are offering depends on the direction of swap rates, upon which fixed rate loans are based.
Swap rates have not been published since early March, possibly because trading volumes are too low, or the markets are too volatile.
As a result, it is difficult to predict whether new fixed rate mortgages will become cheaper.
Will mortgage rates fall further?
Only a handful of lenders have made changes to their mortgage ranges since last week’s reduction, and these have tended to balance a mixture of both rate reductions and increases across selected products.
Competition was already intense and mortgage rates were close to record lows even before last week’s base rate reduction, and with lenders’ margins wafer thin, it is unlikely rates will fall much further.
Eleanor Williams, finance expert at Moneyfacts, said: "We have already experienced a significant fixed rate war in the mortgage sector over the last year or so, and with margins becoming ever-tighter, it’s not clear how much, if any, of this base rate reduction will be passed on to new borrowers."
Even so, if you are coming to the end of a mortgage deal or currently sitting on your lender’s standard variable rate, it is an excellent time to remortgage.
Top 3 takeaways
The Bank of England has slashed interest rates to a record low of 0.1% in its second emergency cut in just over a week
The move triggers an automatic mortgage rate reduction for many homeowners on tracker rates, as well as some standard variable rate customers
The cumulative 0.65% reduction to the base rate will save someone with a £100,000 mortgage £650 a year if lenders pass it on in full
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