On the 11th of March The Bank of England announced an emergency cut in interest rates in response to the coronavirus outbreak, the announcement reduced the base rate by 0.5% from 0.75% to 0.25%. This took borrowing costs back down to the lowest level in history only seen previously in the months after the credit crisis in 2008.
The governor of the Bank Of England stated the rate cut would “help UK businesses and households manage through an economic shock that could prove large and sharp, but should be temporary”. He also stated that the impact the coronavirus will have is unclear and the UK economy could shrink in the coming months.
Will Your Payments Go Down?
Although the Bank of England base rate has been reduced by 0.5% mortgage lenders may not always pass this reduction in rate onto their customers for a variety of reasons. The bank or building society you have your existing mortgage with and the type of mortgage product you are on will determine how you will be affected.
One of the most common mortgage products people take out is a fixed rate of interest as this gives you certainty as to what your monthly payments will be each month for a period of time. If you have a fixed rate on your mortgage your payments and interest rate will remain the same after the cut.
However if you are unsure of either what interest rate you are fixed at, or when your current rate is due to come to an end. It is well worth checking your most recent mortgage statement or speaking to one of our qualified mortgage advisors to help you obtain this information.
If you have 4 months or less on your current fixed interest rate, you may be in a position to start the process of a remortgage to obtain a new deal for your mortgage. If you have longer to go until your fixed rate ends, one of our advisors would be able to tell you if you could benefit from a remortgage to obtain a new product earlier.
This is a less common mortgage product designed to allow the interest rate you pay to go down but not up past a certain point. Many of these deals may remain unaffected by the interest rate cut as they will often follow a lenders variable rate which in many cases is not linked to the bank of england base rate.
The decision to pass on this cut is made by the bank or building society providing the mortgage. If you are currently on a capped rate, it is worth checking your most recent mortgage statement to establish how this works for you. Even if your mortgage payments have been reduced by the interest rate cut as the rate you are on could already be higher than products available to you.
If you have 4 months or less on your current capped interest rate, you may be in a position to start the process of a remortgage to obtain a new deal for your mortgage. If you have longer to go until your capped rate ends, one of our advisors would be able to tell you if you could benefit from a remortgage to switch to a new product earlier.
Many mortgages are “tracker rates” and it is easy to assume that this would mean the interest rate you are paying will automatically go down following the interest rate cut but this is not always the case.
If your mortgage is a bank of england base rate tracker then your interest rate should reduce by 0.5% and your mortgage payment will reduce accordingly. There are some reasons this may not happen though, if for example the product you are on has a “collar” then it may not be able to drop below a certain level and in times of historically low rates these clauses can often be triggered.
It is also worth noting that base rate tracker mortgages will usually add a certain percentage on to the Bank of England base rate and so the rates paid can vary hugely from lender to lender.
Other types of trackers include LIBOR trackers which do not follow the Bank of England base rate but instead follow the LIBOR rate, although the LIBOR rate can also be low the actual interest rate charged by the lender can be several percent above this rate.
Variable rate trackers can sometimes only track the lenders variable rate and can also be referred to as discounted rates. In many cases this is not linked to the bank of england base rate and the decision to pass this cut on is made by the bank or building society providing the mortgage.
As with all of these types of Tracker rates, it is often the case that there is no early repayment charge if you are to leave these products and you can start the remortgage process at any time.
It is always worth checking your most recent mortgage statement and speaking to one of our qualified mortgage advisors to establish if you could benefit from switching to a new product. Even if you are happy with your current tracker and the risks involved, it may be possible to remortgage to replace this with a lower rate of interest.
Standard Variable Rate (SVR)
A variable rate mortgage is the standard rate of interest for the majority of mortgages, in most instances this is set by the bank or building society so there are no guarantees that your interest rate or payments will fall. If you have not reviewed your mortgage for a long period then you could well be on one of these rates.
These rates vary hugely but in some cases can be over 5% and there are often lower rates in the form of fixed rates or tracker rates available, sometimes even from the lender you may already be with.
Even if you have seen your interest rate and mortgage payment reduce, it could still be worth checking your most recent mortgage statement and speaking to one of our qualified mortgage advisors to see if you could remortgage to obtain a lower rate of interest for your mortgage.
What Can You Do To Take Advantage?
Historically low interest rates in uncertain times created by the current global situation can present you with an opportunity to review your current financial outgoings.
Even if you have seen a fall in your mortgage payment, there could still be a lower rate of interest available to you. If you pay a higher rate of interest in other areas such as loans, credit cards & car finance you will probably see no changes to the interest rates paid on these.
You may not wish to reduce the amount you pay monthly, a reduction in the interest rate you pay could lead to a reduction in the term of your repayment mortgage and allow you to pay off your mortgage early.
If you are looking to borrow more money for home improvements, debt consolidation or any other purpose this could be a great time to do this. Many lenders offer fixed rate and base rate tracker mortgages with incentives such as free legal fees and no valuation costs
Our fully qualified advisors can offer a full review of all of these outgoings, any additional borrowing requirements and insurance or protection products you may have. This could potentially lead to large savings on your overall monthly outgoings and a reduction in the overall amount of interest you pay.