Bank of England cuts interest rates – how your mortgage will be affected
In a recent Monetary Policy Committee meeting, the Bank of England decided to cut its Bank Rate to 5% from the previous 16-year high of 5.25%. This reduction brings a glimmer of hope to borrowers who have been anxiously waiting for a shift in the central bank’s policy. For many, this rate cut could signal the beginning of a more favourable downward cycle in interest rates, which has been a long-awaited relief given the economic pressures of recent years.
The Bank of England's decision deviates from earlier forecasts. At the start of the year, many experts anticipated that interest rates would be reduced sooner, predicting a drop to around 4.75% by the end of 2024. However, ongoing inflationary pressures, coupled with stubbornly high wage growth and service inflation, have led to a more gradual approach. This adjustment reflects the central bank's cautious stance in navigating a complex economic environment.
For those holding mortgages or looking to buy their first home, this rate cut brings a long-awaited sigh of relief. Myron Jobson, senior personal finance analyst at Interactive Investor, highlights that "those in the market for a mortgage will be jumping for joy as lower rates are likely to result in cheaper mortgage deals." While the magnitude of the rate cut’s impact on mortgage rates remains uncertain, even modest reductions could lead to significant savings for borrowers. The estimated 1.2 million people on tracker and standard variable rates will see an immediate decrease in their monthly payments, easing some of the financial strain they have been experiencing.
However, the news is less encouraging for savers. With the Bank Rate now reduced, savings rates are expected to decline. Britons who have benefited from higher interest rates on their savings will likely see a decrease in returns. Jobson advises savers to act quickly to secure the best available deals before rates fall further, indicating that the landscape for savings could become less favourable in the near future.
For first-time buyers and those remortgaging, the reduction in the Bank Rate offers a mixed bag of outcomes. While those on fixed-rate mortgages will see no immediate change, the 1.5 million individuals needing to remortgage this year might find their costs remain relatively high due to the historically low rates seen two years ago. Currently, the average two-year fixed-rate mortgage stands at 5.77%, with five-year deals averaging 5.38%, though competitive offers can be found.
Recent weeks have seen a slight decrease in rates, and lenders have begun to adjust their offers in anticipation of further rate cuts. Nationwide, for instance, recently became the first high-street lender to offer a mortgage deal below 4% since April. For those without a fixed-rate deal, the 0.25 percentage point reduction in the Bank Rate could mean a decrease of about £32 per month or £384 annually on their mortgage payments, according to TotallyMoney. In high-cost areas like London, where the average property price is significantly higher, the potential savings could be even more substantial.
Experts like Rachel Springall from Moneyfactscompare.co.uk point out that fixed mortgage rates have been trending downward, driven by lower swap rates and a more competitive lending environment. “Waiting six months for rates to fall will no doubt require a lot of patience from borrowers who are counting down the days towards the end of their low-rate fixed deal,” she notes.
Looking ahead, brokers are optimistic that mortgage rates will continue to fall. Nicholas Mendes from John Charcol predicts that a 3.5% five-year fixed rate could be achievable by early next year, given the current market trends and anticipated further cuts in the Bank Rate.
For those with variable-rate mortgages, the recent cut could provide some financial relief. According to UK Finance, there are approximately 643,000 homeowners with tracker mortgages and 679,000 on a standard variable rate. A reduction of 0.25% in the Bank Rate could translate to a saving of about £46.15 per month for a typical £300,000 loan over 30 years. With an average two-year tracker rate of 5.95% and a standard variable rate of 8.16% as of August 1, 2024, borrowers may see their payments decrease if lenders pass on the rate cut.
Overall, while the Bank of England's decision to lower the Bank Rate is a positive development for borrowers and those seeking to remortgage, savers may need to adjust their expectations as interest rates on savings accounts are likely to decline. As always, staying informed and proactive will be crucial in navigating these evolving financial conditions.
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