Shock Bank of England interest rate cut to historic low – what does it mean for mortgages?
UK mortgage market activity was at a four-year high prior to first-rate reduction last Wednesday as the property market had in previous weeks seen a strong resurgence since January, before it was brought to an abrupt halt by the Covid-19 pandemic.
In an effort to brace the nation’s finances and stave off a protracted economic downturn as best possible, the Bank of England Monetary Policy Committee held an additional special meeting this afternoon, at which the apparently unanimous decision was made that further measures were required, over and above the previous Bank Rate reduction on 11 March.
Whilst the events of this week may cause some prospective home movers to pause and reconsider, it could create a significant demand for remortgages if many who were considering moving property in the next few months instead decide to stay put for the short to medium term.
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In practical terms then, what does this mean for those who either have a current mortgage or are in the process of applying for one?
At the moment, for those who are already locked into a fixed rate product, their payment won’t change, as is the very nature of a fixed-rate mortgage.
Yet if lender rates do reduce significantly, then even if you’re on a fixed rate deal now with Early Repayment Charges (ERCs) it may still be worth talking to a mortgage adviser to run the sums to see if you’d be better off on a new deal, even if you do have to pay the charges to exit your existing product.
But what about those on their lender’s Standard Variable Rate (SVR) or a tracker product?
For those who have a mortgage product directly linked to the Bank Rate, then they are likely to see their next mortgage payment reduce, slightly more than it already would have done so following the initial reduction earlier this week.
However, not all tracker products and SVRs are linked to the Bank Rate, so you’ll need to check the terms and conditions of your mortgage.
Also, it’s worth remembering that some trackers have ‘collars’ and ‘floors’.
A ‘floor’ is the interest rate minimum charge, while a ‘collar’ is the minimum interest rate that will apply. That’s why it’s best to refer to your lender or mortgage broker and confirm what applies to your product, rather than just assuming that your next mortgage payment will reduce.
But don’t assume all mortgages will become cheaper over the next few days. In some cases, lenders have actually increased the cost of their SVRs and tracker mortgages.
That’s partly because the swift response taken by the Bank of England to try to stave off prolonged economic turmoil is to build in enough fiscal ‘slack’ so that lenders can offer those who need them mortgage payment holidays.
It’s not about making borrowing cheaper per se, it’s about trying to help as many borrowers as possible to stay out of mortgage arrears if they are unable to work or lose their jobs.
Andrew Montlake, Managing Director of Coreco Mortgage Brokers explained: “Lenders have their own issues to deal with. In fact, we’ve already seen some lenders, especially more specialist providers, increase their rates to protect their positions.”
Andrew continued: “We truly are living in extraordinary times with not one, but two Base Rate cuts in the same week. With Bank Base now at the lowest rate in history, we expect a clamour for advice around what this means for mortgage borrowers.
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“Those on a tracker rate product are likely to feel an immediate benefit, but I do not expect to see fixed rates also cut to the bone. For those looking at remortgaging within the next six months, now seems the right time to get on with it.”
Lea Karasavvas, Managing Director of Prolific Mortgage Finance is advising his clients: “To try and leave themselves with as much flexibility as possible by opting to maximise on the low margins whist they are still available.
“I would expect trackers products to increase after this cut, so where possible, it’s best to move quickly and secure tracker products with no redemption penalties at all.”
Lea added: “No one knows how long we will be in this position, so rather than locking down with a fixed rate product, borrowers could benefit from taking a low margin tracker that gives them the option to swap out to another product with no penalties for as long as they are available. Flexibility is key, and lenders will always give the option to swap from a no penalty deal to a fixed rate, providing there are no redemption penalties within the tracker products at present.”
“As things are changing so frequently my advice would be to leave yourself as flexible as possible so you can adapt with the change as and when they occur.”
Looking at the bigger picture, Mark Harris, chief executive of mortgage broker SPF Private Clients, observed: “In essence, we have zero interest rates. The Bank is trying to do all it can to reassure and stave off a recession. Will it have the desired effect? It is hard to say. These are unchartered times.”
Mark concluded: “If there is anything encouraging to take from this, it is the Bank’s comment that it hopes the economic shock ‘could be sharp and large but should be temporary’. Like many, the Bank is anticipating that this will be a three-month issue but if it goes on longer, then it will have to think again.”
The Bank of England Monetary Policy Committee is due to meet again as scheduled on 25 March, with the resulting minutes published on 26 March.
Follow Louisa on Twitter: @louisafletcher
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