What does the Bank of England's Rate cut mean for Mortgages?

Following the Bank of England’s (BOE) decision to cut interest rates for the first time in seven years to a fresh historic low rate of 0.25%, a number of borrowers have already seen their mortgage interest rate lowered to reflect the new rate.

And, while some lenders have delayed passing the lower rate on to their customers until September 1st, there are still a few who are yet to make a decision on whether their mortgage rates will fall at all.

BOE governor Mark Carney introduced a number of measures to encourage lenders to pass the rate cut on, in full, to consumers. They include a new Term Funding Scheme (TFS) which means banks have access to cheaper funding, also at the rate of 0.25%, so they won’t make any loss by passing the full rate cut onto customers.

"By acting early and comprehensively, the (Bank) can reduce uncertainty, bolster confidence, blunt the slowdown and support the necessary adjustments in the UK economy," BOE Governor Mark Carney told a news conference.

In years gone by and when rates were much higher than they have been more recently, it was commonplace for lenders to pass rate cuts – and hikes – on in full to their client base, immediately. This time, however, some banks have been reluctant to do so.

Customers on base rate tracker mortgages are among those most likely to benefit from the rate reduction sooner-rather-than-later, as the very premise of that type of mortgage is that it tracks the BOE’s bank rate. Many home-owners with a mortgage on their lender’s standard variable rate (SVR), meanwhile, are still awaiting the cut to kick in, while some don’t yet know if their monthly payments will fall at all.

A summary of what UK lenders have done follows:

HSBC and its subsidiary First Direct immediately passed the rate cut onto its tracker mortgage customers, while their SVR customers will see a reduction from September 1st.

Barclays, Coventry Building Society, Halifax, Lloyds, Nationwide, Santander, Yorkshire Building Society and Virgin Money are all cutting their tracker and SVR mortgages from September 1st.

RBS and Natwest have said they have already passed the reduction on to tracker customers, but were still discussing the impact on their SVR products.

Halifax, Clydesdale, Skipton Building Society, Bank of Ireland, Yorkshire Building Society and TSB, meanwhile, were as yet (as of August 10th) still discussing whether or not the new low base rate could be passed on due to existing ‘floors’ in their products.

For home-owners with a 25-year mortgage for a sum of between £165,000 and £200,000, a 0.25% rate cut would mean their monthly payments would fall by £19-£25.

Lower interest rates are also good news for prospective home-owners, as it should mean their affordability levels have improved – however marginally. Of course, there are plenty of great fixed-rate deals around already and the BOE’s move could mean even lower rates here too.

In order to ensure you benefit from the new lower Bank Rate when you buy a home or are thinking about re-mortgaging - it could be a good idea to seek advice from professionals.

However you select your mortgage, it’s worth taking the time to make sure you’re getting the best deal around that incorporates the new, lower lending rate sanctioned by the UK’s central bank.

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