Interest Rate Reduction For The First Time Since 2020: Implications for Mortgages
The Bank of England (BoE) has announced a reduction of the Base Rate to 5% this month, a decrease of 0.25%. This marks the first cut in four years. The Base Rate had remained at 5.25% since August 2023, following 14 consecutive increases.
The Bank of England (BoE) had been increasing and maintaining interest rates to combat high inflation, which exceeded 10% in early 2023, significantly above the government target of 2%. In June, it was announced that inflation had decreased to its target of 2%, a level that persisted in July.
Speculation abounded regarding the BoE's decision, with markets predicting an equal likelihood of maintaining the current rate or implementing a 0.25% cut.
The debate on whether the BoE would hold or reduce rates today stemmed from persistent 'service inflation' in June, which pertains to services such as hospitality and culture, rather than goods.
The BoE aims to balance lowering inflation with sustaining economic health. This recent rate cut indicates the BoE's confidence that its inflation control strategy is effective and that continued high rates could negatively impact businesses and households.
Recent Mortgage Rate Trends
In January, an unexpected inflation rise caused mortgage rates to increase through the spring. However, with inflation returning to 2%, mortgage rates have stabilized. Recently, a new government and competitive mortgage lenders have accelerated rate reductions, including the introduction of sub-4% rates for borrowers with larger deposits.
The average 5-year fixed rate has decreased from 6.08% in July 2023 to 4.87% this week, while the average 2-year fixed rate has dropped from 6.61% in July to 5.25%. Updated average mortgage rates for various terms and deposit sizes can be found here.
Expert Opinions
Mortgage expert Matt Smith states, "The long-awaited Base Rate cut has arrived. While imminent mortgage rate reductions may not be substantial, the downward trend should continue, potentially leading to further cuts. However, mortgage rates are expected to stabilize at higher levels than before, with the Base Rate anticipated to fall to approximately 3.25%."
Impact of Base Rate Reduction on Current Mortgages
Changes in the Base Rate affect interest payments on loans, including mortgages. Fixed-rate mortgage holders will see no change in their payments until their term ends, whereas tracker or variable rate mortgage holders will benefit from this month's Base Rate reduction in their monthly payments.
For those nearing the end of their fixed-rate mortgage, it is advisable to start considering new rates now. A mortgage calculator can help determine borrowing capacity, and a Mortgage in Principle application can bring one closer to a mortgage offer.
Mortgage Charter and Borrower Assistance
In July 2023, the Mortgage Charter was introduced to assist those struggling with payments and those nearing the end of their fixed-rate periods. The Charter encourages lenders to offer new deals up to six months before the current rate ends. Remortgaging with another lender is also an option but involves a more extensive process.
Affordability Implications of Base Rate Reduction
Lenders’ 'stress test' calculations, used to determine mortgage affordability, are linked to Standard Variable Rates (SVRs). A reduction in SVRs, following the Base Rate cut, may improve affordability due to lower stressed amounts.
Future Interest Rate Trends
The BoE’s Monetary Policy Committee meets every six weeks to review interest rates. Historically, after periods of rate increases, rates plateau before decreasing. Although a downward trend has begun, it is unlikely that rates will return to the lows of 2021. The market anticipates one more 0.25% rate cut by the end of the year, subject to broader economic conditions
The next interest rate decision will be announced at 12 pm on 19 September 2024.
