August 5, 2016

What does the base rate cut to 0.25% mean for mortgages?

On the 4th August it was announced by The Bank of England that the base rate – England’s official borrowing rate which influences what borrowers pay and what savers earn – has been cut from 0.5% to 0.25%, after the Monetary Policy Committee unanimously agreed this was the best step forward for the UK economy.

This decision comes after the UK voted to leave the EU in June.


The new 0.25% rate is a record low and the first cut since 2009, when it was cut in an attempt to protect the UK economy from the global financial crisis.


The decision had been rumoured back in July when The BoE announced that they would be holding the rate at a steady 0.5%, however hinted that in August it could be reduced to 0.25%.


This decision is bad news for savers, however it is good news for borrowers and in particular mortgages. Some mortgages will remain the same, if they’re on a fixed rate, whilst a tracker mortgage will benefit from the cut.


What does it mean if I’m on a fixed-rate mortgage?


If you‘re on a fixed-rate mortgage you won’t feel any effect of the recent base rate cut. Around half of mortgages are on a fixed rate – meaning you are locked into paying a certain interest rate for a certain amount of time.


Regardless of the cut – what you’re paying each month will not change until the fixed period ends. If the rate remains at an all-time low, when the fixed period ends it may be worth talking to a mortgage broker for advice.


Visit Coreco for advice on mortgages here http://www.corecogroup.co.uk/

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What does it mean if I’m on a tracker mortgage?


A tracker mortgage follows The Bank of England’s base rate, which means your monthly payments will be reduced by an average of £20 per month on a typical £150,000 mortgage. It’s a small saving, but it’s still a saving.


Andrew Montlake, director at Coreco Mortgage Brokers comments, “In cutting the Bank Base rate to a new historical low, the Governor has at least delivered on his pledge to help try to boost an ailing, post-Brexit economy.


There is a risk, however, that he has acted too early, potentially diluting a more powerful weapon to use in the future should the need arise.


“The immediate benefit of a cut will be felt by those mortgage borrowers with a tracker product who, for a 0.25% cut, should see their monthly payments reduce by approximately £24.16 on a mortgage of £200,000 over an average 25-year repayment mortgage or £41.66 if interest only.”


“However, it is not a foregone conclusion that your mortgage will fall all the way down as some lenders have a “collar” or floor below which they will not reduce rates further.”


Some other lenders use their own version of Bank Base Rate which, although it always has historically, does not have to mirror the Bank of England. Borrowers should, therefore, check the small print of their mortgage product carefully.


“Similarly lenders may not rush to reduce their Standard Variable Rates as many will be keen to protect their margins and ensure they remain profitable.


“As far as fixed rates are concerned, Swap Rates have fallen dramatically since the Brexit vote so have to some extent already priced in a cut such as this.


” Although we do seem to be getting towards a point where lenders will be loath to cut any further, competitive pressure remains strong and should ensure the current crop of low rates continue for the foreseeable future, with the potential of even lower offerings over the coming weeks.


“It would, therefore, make sense for borrowers to take professional advice as reviewing their options now could amount to a significant saving in their monthly mortgage payments and there has scarcely been a better time to lock in to the relative safety of a long term fix for those that need additional security.”


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