The Bank of England has voted to cut the cost of borrowing, reducing the base rate from 5.25% to 5%. It is the first cut since March 2020 and follows a succession of increases that have taken the rate from a record low of 0.1% nearly three years ago.
Will my mortgage get cheaper?
Not if you are on a fixed rate – and most borrowers are in this camp.
According to the trade body UK Finance, as of last December 6.9m residential mortgages were on a fixed rate – more than 80% of all outstanding home loans. Of the rest, 643,000 were on a tracker mortgage, with a rate directly tied to the base rate, and 624,000 were on a lender’s standard variable rate (SVRs).
Only the tracker mortgage customers are guaranteed to see their payments go down. Although it is likely that lenders will reduce their SVRs, they are not obliged to do so and could choose to keep their rate the same or just pass on some of the cut.
UK Finance’s figures showed the average tracker mortgage was worth £136,512 and on a rate of 6.47%. A 0.25-percentage point cut reduces the monthly repayment by £28 to £977.
The average outstanding mortgage on an SVR is £69,581, with a rate of 7.81%, so if the full cut is passed on monthly repayments will drop by £14.50 to £663.
You should be told how your repayments will change and when – it is likely to come into effect in September.
Santander has announced it will cut trackers and its SVR-linked deals from 3 September, while Coventry building society has said it will reduce rates from 1 September.
How about new fixed-rate home loans?
These mortgages, which have rates that are guaranteed for a set period, typically two or five years, are priced according to what the money markets think will happen to interest rates, rather than the current base rate. But Thursday’s cut could persuade them that there are more reductions to come, so prices could start to fall.
Over the course of the year rates have gone up and down, in line with the money market’s expectations and mortgage lenders’ appetite for business. We have already seen rates fall in recent days – with five-year deals coming below 4% last week – but there could be more to come imminently.
“The lenders have already cut margins to the bone, so this cut was pretty much priced into fixed rates,” says Simon Gammon, a managing partner of the mortgage brokers Knight Frank Finance. “That said, we’ve seen that the larger lenders are happy to take a hit to profits to gain market share, so we may well see another round of marginal cuts in the days ahead.”
The Bank’s vote was close, and its governor, Andrew Bailey, has warned it should not cut rates too quickly or by too much, so it seems unlikely mortgage costs will be slashed.
Should I lock in my savings rate now?
Yes. As with mortgage rates the returns on savings are generally not entirely tied to the Bank base rate, but Thursday’s reduction is likely to be passed on to many savers who have easy-access accounts and others who do not have guaranteed interest rates.
Rates on fixed-savings bonds have been falling as expectations of interest rate cuts have grown. Last September, you could earn more than 6% on a one-year account and just below that on a three-year deal. Last weekend, the best buys were under 5.5% and the average one-year account paid 4.64%.
Today’s best rate for a one-year bond is 5.26% on offer via the savings platform Raisin – it will drop on Friday to 4.96% and you can expect other top rates to be pulled in the days ahead.
What about loans and credit cards?
Most personal loan rates are fixed so if you are already borrowing money in this way you will continue to pay interest at the rate you originally signed up to. New borrowing could come down in price, but rates are unlikely to fall significantly and will remain much higher than they were three years ago.
Credit card rates went up in recent years as the base rate increased. However, they are not explicitly linked to it, so providers will not be obliged to pass on cuts.