I thought that a reduction in interest rates was bound to happen last month and then, having heard some economists suggest that reducing interest rates might not do much for the economy, I thought they’d be on hold this month. Clearly I’m not very good at financial forecasts, as here we are now in August with a fall of 0.25%!
Regardless of what type of mortgage interest rate you’re charged by your lender - be it fixed for a certain period, a variable rate that may or may not move in line with the base rate or a tracker, which is normally linked to the base rate – it’s still worth checking with your mortgage broker whether you should stick with your current deal or look at switching.
This fall has come on top of a wobble in the market, which is partly due to the summer, partly because of the ‘forward buying’ earlier in the year by people trying to avoid the 3% stamp duty and partly due to the uncertainty created by the Brexit vote. The combination of these factors means now might be a good time to re-finance and also buy a bargain from a vendor who really needs to sell.
And if you’re used to being able to claim tax relief on your mortgage payments at the highest rate, you must talk to your mortgage broker and property tax advisor, if you haven’t already, to work out the implications of recent legislation on your profitability after April 2017. That’s when the amount of relief you can claim starts to reduce from 40% to 20%, phased in over four years to 2020. Even if you’re currently in the 20% tax band, because the way in which you can claim the relief is also changing, you could be pushed into being a higher rate 40% tax payer overall, so it could affect you too. For more information.
Remember the amount of tax you pay isn’t just based on just the rent you earn, it includes all your other income - be that a salary or pension you take home - so you need to seek individual, specialist advice to understand the impact that the mortgage interest relief changes will have on your own personal finances.
How much will you save with a 0.25% fall in mortgage interest rates?
You can use the Mortgage Advice Bureau calculator to see how the changes will affect your mortgage payments if the reduction is passed on by your lender. As a guide, it works out as £20.83 less for every £100,000 you borrow, based on an interest-only mortgage.
Although you may think that doesn’t sound very much, it is fairly significant when you add it up over time. A saving of nearly £250 for each £100,000 on your mortgage is enough to pay for a gas and electrical survey or a few rooms to be decorated.
Five ‘must dos’ following a fall in mortgage interest rates:
- Check with your lender/broker whether this is going to be passed on to you
- Understand how much you will save each month/year
- Consider whether to re-invest this saving in your buy to let investments, put it aside for a rainy day or use it to help offset any increases in tax
- Work out from a financial perspective if now is a good time to expand your buy to let portfolio
- Check the local market to see whether there’s an opportunity now to find some property bargains.
This information has been provided by our partner Mortgage Advice Bureau. For more information relating to Mortgages or for Mortgage Advice please visit Mortgage Advice Bureau.