Bank of England’s 0.5% emergency rate cut amid coronavirus outbreak will mean monthly savings for households with follow-on mortgages, but more pain for savers as interest paid shrinks again – and for most borrowers who have fixed-rate mortgages there is no gain at all.
I have a fixed rate mortgage of £ 200,000. What does it mean for me?
Sorry, you don’t get anything. Nine out of 10 new mortgages are fixed rate (92.4% was the fourth quarter 2019 figure), normally for a period of two or five years, so, unfortunately, this rate reduction is not passed on. You will have to wait until you remortgage to find a better rate.
I have one £ 100,000 base rate follow-up mortgage. How much do I save?
Follow-up mortgages, which promise to evolve in accordance with the bank of england base rates, were popular before the financial crisis and many people still pay them.
The exact amount you save will depend on whether your mortgage is interest-only – where you don’t pay back the principal borrowed until the end of the term – or a repayable loan, where you repay the principal borrowed each month.
If you have a £ 100,000 interest-only mortgage, the monthly cost will drop by around £ 42 per month. So if your current interest rate is 2% and it drops to 1.5% after that drop, your monthly payments will drop from £ 167 to £ 125.
For a £ 100,000 tracker mortgage on a repayment basis, the monthly cost will drop by around £ 24 per month. So if your current interest rate is 2% and it drops to 1.5% after that drop, your monthly repayments will drop from £ 424 to £ 400.
I have a rental mortgage. Am I going to have a haircut?
Almost certainly. Almost all rental mortgages are loaned on an interest-only basis, as it is the most tax-efficient way for homeowners to borrow. The rule of thumb is that a 0.5% reduction in the rate equates to a savings of around £ 40 per month for every £ 100,000 borrowed.
I am about to take out a mortgage. Will I see better deals?
Yes. When interest rates last hit this level, some banks started offering two-year fixed rate contracts below 1%. But you had to have a big deposit to qualify.
Currently, the best two-year deals come from NatWest (1.19%) and Barclays (1.21%), but new deals are sure to be on the horizon. Five-year agreements are also set to drop.
Mark Harris, Managing Director of mortgage broker SPF Private Clients, says: “This is a bold and decisive move by the Bank of England. Swap rates have fallen in recent days and lowering the base rate, along with lower swap rates, will lead to even cheaper mortgage products.
“We expect five-year prices to fall near their previous high of 1.29% in 2017 (for a five-year fix from Atom Bank). The big question is whether they can fall in below 1%? “
Will my savings rates turn negative?
Not yet, but be careful. The best rate in the savings market right now is 2.15%, but you need to lock in your money for seven years. You can still find a rate of 1.7% on a one-year foreclosure on your money at BLME bank. Ford Money has the highest easy access rate of 1.35%, but it is only available to existing customers. You can expect a scramble to remove these rates and revise prices down in the hours and days to come.
But it is for the people who scour the market for good rates. For most of the people who have conventional accounts at the big banks, there really isn’t much more they can cut. Most banks are already paying less than 0.5%. For example, HSBC’s popular Flexible Saver account pays 0.1% or 0.15%.
So, are the banks going to turn negative? This has not happened in the UK, but has been applied to some customers with large balances in Denmark and Switzerland. More likely, savings rates on traditional UK accounts will simply drop to zero.
What about my credit card?
You might save a bit. Andrew Hagger of MoneyComms says, “If your credit card provider is the one that ties your rate to the base rate, you’ll see cheaper borrowing costs, but the impact will be minimal – 0.5% less on a £ 2,000 credit card balance equates to just £ 10 in savings. interest in one year – less than £ 1 per month. “