05 Aug How Will the Latest Interest Rate Cut Effect Your Mortgage?
After endless speculations, the Bank of England announced yesterday a cut in interest rates to 0.25%. This is great news to hundreds of thousands of hoe owners and borrowers, but not such good news for savers!
A huge proportion of people in the UK will fall into both these categories so let’s take a look at how it will effect each group.
A mortgage is almost certainly the biggest household debt which will be taken on by most in their entire lifetime in the UK.
According to the Council for Mortgage Lenders, around 11.1 million households have a mortgage and the the average amount due still to pay on each home in the UK is £116K.
It is estimated that a cut of 0.25% means a monthly reduction of £22 on a repayment mortgage on a home priced around £211,000 over a 25-year term, having taken a 20% deposit into account. This equates to a £22 cut on a monthly mortgage bill of around £779.
Those will tracker mortgagees will see the effect of the cut straight way, as mortgages with an interest rate go up or down directly in relation to Bank of England’s decision. Around one on five mortgage holders are believed to be have a tracker type of loan.
It is estimated that around a third of mortgages are on the standard variable rate, this means that the default option will kick in once the fixed term has come to an end.
Ultimately the reduction in payments is in the hands of the lender. Some mortgage providers will pass the cut on in full to the lender, others may only decide on a partial cut and some may not make any changes at all given the historical low levels on interest rates. Check with your individual lender to see how it will affect your monthly payments.
A number of banks announced immediately that they would pass the cut on to borrowers in full, from September this year, while others have remained silent but it is presumed they will follow suit.
A new initiative has been announced by Mark Carney, governor of the Bank of England, called ‘Term Funding Scheme’ or ‘TFS’. Its purpose is to help mitigate a reduction in the Bank of England’s benchmark interest rate for commercial banks who are already feeling a squeeze on their profitability. Mark Carney said banks have no excuse not to pass on the cut to all households.
Lastly, around nearly half of all mortgage holders have a ‘fixed term mortgage’. These people will see no change in their monthly payment until their mortgage term is up. They may find they end up paying less at the end of the term or they will have the choice to of signing up to a new ‘fixed deal’.
The main theory in the Bank of England interest rate cut is to see consumers get a cut in their monthly mortgage payments, leaving people with additional ‘free’ expenditure to what they wish. The idea being that they go and spend, boosting the economy. The same theory applies to business who will be more interested in investing. However, this doesn’t make it easier for savings, as the average interest rate on an easy access savings account is 0.65%. If that average mirrors a change in the bank rate, this will equate to a drop to 0.4%.
This means anyone with savings of £10,000 will receive £40 gross interest per year, which is £25 less than they would have received pre-cut.
If you would like any further information on how the Bank of England interest rate cut will effect your mortgage, or questions above moving home, drop us an email on email@example.com or call us on 0131 608 0175. Your first step in buying a property is acquiring a Home Report, we can do this at a time to suit you at a competitive price.