What Does the Interest Rate Cut Mean to Borrowers?
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What Does the Interest Rate Cut Mean to Borrowers?

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Carl Shave Carl Shave | August 19, 2016

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The Bank of England base rate has been cut from 0.5% to 0.25%, representing the first change to interest rates since 2009. But what does this mean for borrowers and mortgage lenders? Are mortgages about to get cheaper, and will the lenders actually pass the base rate cut on?

What Impact Will a Base Rate Cut Have on the Economy?

For the past couple of years there has been much speculation about a possible interest rate rise and when this might occur. However, last month, prompted by the UK’s vote to leave the EU, the Bank of England made a U-turn and decided to cut the already historically low base rate by half. The aim of the base rate cut is to stimulate spending in the economy to protect against the uncertainty and potential reduction in activity caused by the UK’s decision to leave the EU. By reducing the incentive to save, the Bank of England hopes to increase the amount of spending in the economy and blunt any potential slowdown. That’s all well and good, but what does the base rate cut mean for you?

Potential Benefits to Borrowers

Generally speaking, most of us are both borrowers and savers, so while the interest paid on our savings will be reduced, so should the cost of our borrowing. Unfortunately, anyone with a fixed-rate mortgage will not feel any benefit from the reduction in the base rate, but if you are borrowing on a variable rate then it’s likely to be good news. Mark Carney, the governor of the Bank of England, has said that the banks have “no excuse” for not passing on the lower borrowing costs to customers, and those that fail to do so will be charged a penalty. So, those on variable rate mortgages should benefit from a reduction in their rates. There are also an estimated 1.5 million borrowers with tracker mortgages who are subject to interest rates which ‘track’ the base rate. These borrowers will see their monthly repayments fall, with reductions likely to be made from the start of September.

What Will the Likely Reduction Be?

The average variable mortgage rate is currently 2.86% on a mortgage of £150,000. If the reduction in the base rate is passed directly on to lenders, they can expect to see an average monthly repayment of £687 fall by £19.68. Generally speaking, the main lenders can choose where they set their standard variable rates, so it will be interesting to see which lenders actually pass the rate cut on.

More Misery for Savers

The economic climate has not been kind to savers for some time, and this further cut will dent returns even more. In fact, according to the financial information firm Moneyfacts, there are now some 385 savings accounts that could offer no interest at all if the whole reduction is passed on. Currently, the average rate of interest offered on easy access accounts is just 0.65%. If this follows the base rate and drops to 0.4%, then in real terms savers can expect an annual return of just £40 on savings of £10,000. Fortunately, presuming the reduction in the base rate is passed on by the lenders, those of us who are both borrowers and savers should be left marginally better off as a result of the cut. If the base rate cut has given you the impetus you need to review your current mortgage deal, please get in touch with our team of mortgage experts to see how much you could save.