What does an interest rate cut mean for mortgages

What does an interest rate cut mean for mortgages?

Every six weeks or so, all eyes are on the Bank of England and its Monetary Policy Committee (MPC) – the group that decides whether interest rates will be increased, held or cut. How they choose to act has an impact on how much it costs banks to borrow money and what rates they can offer to savers and borrowers.

With all this in mind, what does an interest rate cut actually mean for mortgage holders and for those weighing up their options as they come to buy or move?

We can help you find the right mortgage deals, guide you through the application process, and provide expert advice tailored to your financial needs.

– GHL Direct Mortgage Advice

Will my mortgage now be cheaper?

For those borrowers that currently have a tracker mortgage – one where the rate closely follows the bank base rate (BBR) – they will see their monthly borrowing costs reduce almost immediately. This is because you will be paying less interest on your mortgage.

It is a similar scenario for those that are currently on a lender’s standard variable rate (SVR), which is a changeable rate set by the lender that typically comes into effect after a fixed rate period ends. These too are likely to be reduced following a cut, although it is important to note that lenders are not obliged to do so.

These types of mortgages only account for less than 1.5 million of the total outstanding mortgages (or 17%)[1], meaning that for the majority of mortgage holders, they won’t feel the benefit just yet.

What about my fixed rate mortgage?

The main reason is that the majority of mortgages in the UK are taken on a fixed-rate basis. This means that your monthly payments are fixed for set a period – typically, two, five or ten years. Whether interest rates rise or fall, the amount you will pay stays the same.

The only time this will change is when you come to change to a new deal, or do you nothing when your fixed rate ends and you to move to your lender’s SVR.

What does it mean for new mortgages?

While a change to the bank base rate doesn’t directly impact mortgage pricing, the overall outlook for interest rates does influence the mortgage rates offered by lenders.

Without getting too technical, this is because many lenders will purchase tranches of money to lend to customers, in addition to lending their own if they have the facility. The amount they pay is set using something called swap rates, which are ever-changing and heavily influenced by economic conditions, market expectations and general sentiment.

If swap rates decrease, then so does the cost for lenders to borrow money, allowing them to pass on savings to their customers and stay competitive. Often, but not always, the indication that interest rates are set to be cut – along with greater certainty around the future path of interest rates – can encourage swap rates to fall and reduce the borrowing costs for lenders and new mortgage holders.

Which option is right for me?

There’s no question that the decision made by the MPC plays a role in the mortgage process, whether it’s changing the amount you pay on a tracker or SVR, or what rate a lender may be able to offer you on a new mortgage.

Whether you’re looking to buy, move or remortgage, it can be useful to know what influences and mortgage pricing to make an informed choice. It’s also valuable to know what different options are available to you and how a change in interest rates – either positively or negatively – can change your monthly outgoings.

Working hand-in-hand with you, we will assess all your options and help you make the right choice for you and your individual circumstances.