Not all homeowners will benefit from the interest rate cut
By Bea Patel on 11 Aug 2016 in Industry News
On 4 August 2016, the Bank of England (BoE) cut interest rates from 0.5 per cent to 0.25 per cent after a record seven years. The record low cut comes as an attempt to offset the threat of a post Brexit vote recession. The BoE base rate effects interest rates in the market, influencing levels of borrowing, lending and saving. It also directly impacts on mortgages.
So will mortgage costs fall for everyone?
There are different types of mortgages available and whether you benefit from the interest rate cut depends on the type you have. We’ve explained this in more details for each type of mortgage:
Fixed rate mortgage
A fixed rate mortgage guarantees a set mortgage repayment for a period of time – this will usually last between two to five years. After your fixed rate period ends, your mortgage will move on to a standard variable rate. As this mortgage is not linked to the BoE base rates, your repayments will remain the same and you won’t benefit from the interest rate cut until your mortgage deal ends.
If you have this type of mortgage, you may not be bound to it. You should check your exit fees and shop around to see if there is another mortgage deal you can benefit from. Seek advice from a mortgage advisor who can assist you with exploring your options.
A tracker mortgage is a type of variable rate mortgage but it follows (or tracks) the BoE base rate.
If the base rate is 0.5 per cent and your tracker mortgage is the base rate plus one per cent, then your interest would be 1.5 per cent. With the new cut in the base rate to 0.25 per cent, your interest rate will fall to 1.25 per cent (base rate of 0.25 per cent plus your one per cent).
There are around 1.5m borrowers with this type of mortgage who will benefit from a reduction in their monthly mortgage repayments. This could be around £20 per month.
Standard variable rate mortgage
A standard variable rate mortgage (SVR) is a type of variable rate mortgage. It is often the mortgage type you will move on to once your tracker, discount or introductory offer deal ends. It can also be considered as a lenders default rate.
The SVR is determined by your lender. It can go up or down at any time and is not based on the BoE base rate. With the new interest rate cut you may not benefit from reduced monthly payments, as this would depend on if your lender decides to decrease the rate.
Mark Carney, the BoE governor has warned lenders to pass on the reduced interest rate savings to borrowers on variable rates. HSBC, Santander UK, Nationwide and Barclays have said they will pass the full 0.25 per cent savings to borrowers on SVR mortgages, although this is likely to begin from September.
You should check the small print of your mortgage documents if you have a variable rate mortgage, as you may expect repayments to fall but find it doesn’t. Some lenders use their own version of base rates and some have a barrier where they will not reduce rates further.
Is your lender cutting their rates?
Some lenders may not be quick to reduce their SVR, and some didn’t pass on cuts the last time the base rate was reduced. The below table gives details of changes to some of the lenders mortgage rates.