Interest rate cut – What it means for your mortgage

So you may have heard recently that the Bank of England has hinted at a cut in the BofE base rate, currently at a record low of 0.5%, but what might this mean for you?

When it comes to borrowing, low rates are good news. It means the cost of borrowing is reduced, however, you need to bear in made that banks and lenders apply their own rate on top of this. The variable interest rate with HSBC for example, is 3.94%.

Those with tracker mortgages should see an instant effect in the event of a rate cut. For example, Nationwide building society has almost 600,000 customers on its “base mortgage rate”, which is 2% above the Bank base rate. “There is no floor, so if the Bank rate was cut, then the rate would reduce,” says a spokeswoman.

Someone with a £150,000 Nationwide mortgage would see their repayments cut from £673 a month to £654 if Mark Carney cuts interest rates to 0.25%. If he slashes them to zero, the mortgage cost drops to £636, which equates to a saving of £444 a year.

The impact is even more substantial if you have an interest-only mortgage, although few homeowners still have these, as they were withdrawn after the 2008 recession hit. These customers would see the cost of repaying a £150,000 loan reduce from £313 a month to £281 at a base rate of 0.25%, dropping to £250 if interest rates hit zero.

Unfortunately, those on a fixed rate mortgage won’t see any change, because, well, it’s in the name. However, it is likely that new products will offer considerably lower rates for those who opt to take out a new fixed rate mortgage after an interest rate cut, so keep an eye out for when your re-mortgage is due.

For those buying property, now is a tricky time – do you proceed and accept you *might* have benefited from a better rate in a few months’ time or hold out until a rate cut is announced and grab a better deal? That is a decision to take based on your own circumstances – if you don’t need to move yet and haven’t already found your dream home or ideal investment, then it’s worth holding out. If however, you are already in a transaction and don’t want to lose the property, don’t lose the confidence of the vendor by delaying the process whilst waiting for news on interest rates.

If you need advice on what to do with your property or mortgage, let me know. I happen to know an excellent and most importantly, independent, mortgage broker. Don’t worry, he hasn’t paid me to write this – he’s just a really good, honest and helpful guy. Drop me a line at a.gunner@mtmproperty.co.uk or comment below.