Interest rate cut for first time since 2020
The Bank of England (BoE) has announced it will reduce the Base Rate to 5% this month, a reduction of 0.25%, and the first cut in four years. The Base Rate had been held at 5.25% since August 2023, after 14 consecutive rises. But what does that mean for mortgages? This is what Rightmove had to say:
“The Bank had been raising, and holding, rates to tackle high levels of inflation, which was in excess of 10% in early 2023 – way above the government target of 2%. It was announced in June that inflation had fallen back to its target of 2%, and inflation remained at the same level in July.
There had been much speculation around how the Bank might vote today, with the markets predicting an equal chance of an interest rate hold, and a 0.25% cut.
The split opinion around whether the Bank might hold or reduce rates today was related to ‘service inflation’ remaining stubbornly high in the month to June. This is inflation relating to ‘services’ – such as hospitality and culture – rather than the ‘goods’ that might go into your basket of shopping.
The Bank’s focus is to strike the right balance between lowering inflation and keeping the wider economy healthy. This drop shows the Bank’s belief that its plan to control inflation is working. And that to continue to hold rates may have a negative knock-on effect on businesses and households, further down the line.
What’s happened to mortgage rates recently?
Back in January, we saw an unexpected rise in inflation, which resulted in mortgage rates edging up throughout the spring. But off the back of positive inflation news over the last few months, which saw inflation return to its 2% target, we’ve seen more settled mortgage rates.
Off the back of the certainty brought by a new government, and mortgage lenders competing for new business, we’ve seen mortgage rate drops gather pace in the last couple of weeks. In fact, we saw the arrival of the first sub 4% rate seen for many months for borrowers with larger deposits, and we can expect more lenders to follow suit in the coming weeks.
The average 5-year fixed rate is down from 6.08% in July 2023, to 4.87% this week, and the average 2-year fixed rate is down from 6.61% in July, to 5.25%. You can check the current average mortgage rates for different terms and deposit sizes here, which we update weekly.
What do the experts think?
Our mortgage expert, Matt Smith, says: “The highly anticipated Base Rate cut has finally arrived, and while those looking to take out a mortgage soon shouldn’t expect to see drastically lower mortgage rates, we would expect the downward trend we’ve started to see continue. This sets us up for hopefully further cuts to come, and when we have seen further reductions to the Base Rate, people should really start to see the impact. However, it’s important to keep in mind that mortgage rates are widely expected to eventually settle at higher levels than previously, with the market view that Base Rate may eventually fall to about 3.25%.”
What does the Base Rate reduction mean for my current mortgage?
Changes to the Bank’s Base Rate can impact how much interest you’ll pay on loans, including mortgages. If you’re on a fixed-rate deal, your monthly payments won’t change until the end of your deal. And if you’re on a tracker mortgage, or a variable rate mortgage that follows Base Rate changes, this month’s Base Rate reduction will mean your monthly payments will take on this drop.
If you’re coming to the end of your fixed-rate mortgage soon, you’ve probably already started to think about the rate you’ll be offered on your next deal.
If you’re thinking of moving home soon, a good way to find out how much you could borrow is to use a mortgage calculator. You can get a personalised result by applying for a Mortgage in Principle, which will take you one step closer to a mortgage offer.
In July 2023, the Mortgage Charter was launched to help those struggling to meet their monthly payments, as well as borrowers who are coming to an end of their fixed rates soon.
The Mortgage Charter encourages lenders to be flexible and offer borrowers the chance to lock in a new deal up to six months before their current rate ends. Of course, borrowers can also look at moving to another lender – commonly known as remortgaging – but this can take longer, as you have to go through a normal lending process, such as income checks, the legal process, and maybe a valuation of your home.
This all takes time, and you would want to make sure you’re looking around a few months before the end of your current deal to avoid falling onto your lender’s on to a Standard Variable Rate – which will cost more than the repayments you’d have made on a fixed rate mortgage. The current average for SVRs is 8.21%
What could the Base Rate reduction mean for affordability?
Lenders’ ‘stress test’ calculations – which is how they calculate whether someone could afford a mortgage were their repayments to jump considerably – are directly linked to the Standard Variable Rates that we just talked about above.
The ‘stressed rate’ is usually the lender’s SVR, with at least 1% added on top. So, if lenders’ SVRs reduce in line with this Base Rate cut, we might start to see affordability improve, because the stressed amount will now be lower than if Base Rate was at 5.25%.
Will interest rates drop further?
The Bank of England’s Monetary Policy Committee meets every six weeks to discuss and vote on whether interest rates should go up or down, or stay the same.
History has shown that after interest rates have increased over time, they have remained flat before starting to come down. So while we’re now seeing the beginning of the downward curve, it’s extremely unlikely that rates will drop back to the historic lows we saw back in 2021.
Right now, it’s looking more likely that, barring any shocks to the wider economy, the Base Rate will continue to edge downwards for the rest of the year and into 2025 – the market is currently forecasting one more rate cut of 0.25% by the end of the year. Though as always, this could change depending on what happens in the broader economic environment.
The next decision on interest rates will be announced at 12pm on 19 September 2024.
Modified article taken in part from an article from: Rightmove
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Important Information
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