Does the Bank of England’s interest rate cut mean lower mortgage rates?

The Bank of England has lowered borrowing costs by bringing down the main interest rate from 5% to 4.75%, a decision that many expected. This marks the second time this year that interest rates have been reduced.

Will My Mortgage Costs Decrease?

Most people would say no. This is mainly because nearly 7 million out of the UK’s 8.4 million current residential mortgages have fixed rates. As a result, 82% of homeowners with a mortgage will not experience any changes.

Nonetheless, some people with fixed-rate mortgages will have to evaluate their choices in the coming months as their existing agreements are nearing expiration.

This week’s rate reduction is expected to result in decreased borrowing expenses for the 629,000 homeowners who have a base rate tracker mortgage. It will also benefit the 693,000 borrowers whose monthly payments are connected to their lender’s standard variable rate (SVR).

Only borrowers with tracker mortgages are assured of a decrease in their payments.

While it's probable that lenders will lower their standard variable rates (SVRs), they are not required to do this. They might decide to maintain the current rate or only partially implement any reductions.

If you have a tracker mortgage with a rate of 6.44% (which is the current average according to UK Finance), a reduction of 0.25 percentage points to 6.19% would decrease your monthly payment by £22. For a £150,000 mortgage with 20 years left, this change would lower your payment from £1,113 to £1,091.

The current average Standard Variable Rate (SVR) stands at 7.95%, based on information from the financial data provider Moneyfacts. If the entire reduction is applied to someone with this rate, their monthly payments for the mortgage example mentioned earlier would decrease by £23, going from £1,250 down to £1,227. However, it's important to note that many individuals with an SVR have mortgages that are smaller in size.

It's very likely that interest rates will be lowered again next year, but the Bank of England is anticipated to be more cautious about future cuts following the budget. The next two times the Bank will announce changes to interest rates are on December 19 and February 6.

Exploring New Home Loan Offers

Fixed-rate mortgages, which lock in your payment amount for a specific time frame (usually two to five years), are mainly influenced by the money markets' expectations of future interest rates instead of the current base rate.

The budget slightly changed the outlook for interest rates in the UK, and when combined with the excitement from the US election outcome, it created some fluctuations in the prices of new fixed-rate deals, which had previously been decreasing.

The anticipation that interest rates might remain elevated for an extended period has led some lenders to raise the prices of certain new fixed-rate offers this week. However, there have also been instances where rates have been lowered.

On Thursday, Moneyfacts reported that the typical new two-year fixed-rate mortgage has climbed a bit to 5.42%, while the average five-year fixed mortgage has increased to 5.13%.

Following the Bank of England's action on Thursday, and as things calm down after the recent budget and events in the U.S., some mortgage brokers believe that lenders will lower the prices of their new fixed-rate offers in the coming weeks. However, there are also those who think that new products might come with higher rates.

Nicholas Mendes, the mortgage technical manager at John Charcol, shared his expectations for mortgage interest rates. He believes they will start to decline again by the end of this year, potentially reaching some of the favorable rates we've had lately, with even more positive changes expected in the following year. However, he cautions that today’s fixed mortgage rates already take into account some upcoming reductions in bank rates. Consequently, he predicts that the best fixed rates will settle in the low 3% range next year.

In contrast, Peter Stimson, the product head at MPowered Mortgages, stated that those expecting the Bank's decision to quickly lead to cheaper mortgages "will probably be let down." He further mentioned that "it's possible that mortgage rates for new borrowers and those refinancing could rise in the upcoming weeks."

If your current fixed-rate mortgage is set to expire in about four or five months and you plan to search for a new fixed-rate option, keep in mind that remortgage offers generally remain available for up to six months. This means you can secure a loan now and see how things unfold before making a final decision.

Many borrowers are considering a base rate tracker mortgage in hopes of benefiting from anticipated future interest rate reductions. Nonetheless, the majority of individuals are still choosing fixed-rate mortgages because they are generally more affordable compared to base-rate trackers at the moment, according to David Hollingworth, associate director at L&C Mortgages. Additionally, a fixed-rate mortgage provides the advantage of consistent payment amounts.

Isn't This Bad News For Savers?

Similar to mortgage rates, savings returns usually aren’t completely linked to the Bank of England's base rate. However, the drop announced on Thursday is expected to benefit many savers with flexible access accounts and those without fixed interest rates.

Recently, many interest rates on savings accounts have decreased. For instance, toward the end of last month, National Savings and Investments (NS&I) revealed that it was lowering the rates on several of its most popular offerings.

Nonetheless, the consequences of the budget have led to further repercussions, and along with the ongoing competition among newer banks for depositors' money, this has encouraged multiple financial institutions to raise interest rates on certain offerings this week.

On Thursday, you could find a fixed-rate savings account offering up to 5% interest from app-based Atom Bank, as long as you were willing to commit to a short six-month term.

The best high-interest accounts that you can easily access are offering rates of up to 5%, but these offers might not be available for much longer.

"Personal Loans Vs. Credit Cards: What To Know?"

Most personal loan interest rates are set in stone, meaning that if you're currently borrowing money through this method, you'll keep paying interest at the rate you agreed upon when you took out the loan.

While new loans may become less expensive, it's unlikely that interest rates will drop considerably.

In recent years, credit card interest rates have risen due to an increase in the base rate. However, these rates are not directly tied to the base rate, meaning that companies are not required to lower them if the base rate drops.