Will the Rates Change Affect Your Mortgage Payments?

August, 2016

Thousands of homeowners have seen their monthly mortgage payments reduced following the Bank of England’s decision to cut interest rates from 0.5% to 0.25%.

During the announcement on August 4th, Mark Carney, the Governor of the Bank of England, said the bank would take whatever action is needed to promote financial stability in the UK. 

“Through the actions taken... we have improved the economic outcomes for this country. There will be less unemployment, more activity, and there will be a greater prospect of a successful adjustment to the new realities that the UK faces,” he said.

The rates cut – the first in seven years, came as no surprise to the financial market, and economists have predicted further cuts further down the line. But where does the recent cut leave your mortgage payments?

Not everyone will benefit

Whether or not you will pay less for your mortgage each month depends on the type of mortgage you have. Those with bank rate tracker mortgages will be the first to notice a saving. Bank rate tracker mortgages are linked directly to the Bank of England’s base rate and lenders are obliged to move rates in line with the bank rate changes.

Based on a £250,000 repayment tracker mortgage paying 2% interest, a monthly payment of £1,100 has fallen by roughly £30. However, only one in five homeowners – around 1.5 million households –  have this type of mortgage loan.

Passing on the cut

29% of homeowners in the UK have a mortgage on the standard variable rate (SVR) and almost half (46%) are on fixed rate mortgages. Most SVR mortgages are not linked to the bank rate and the decision to pass the saving on to these borrowers is at each lender’s discretion. Whilst some mortgage lenders were quick to announce that they would be passing the cut on to borrowers, not all have been so eager. However, Carney said that mortgage lenders had “no excuse” not to pass on the rates cut.

Borrowers with existing fixed rate mortgages won’t see any change to their payments.

Andrew Montlake, director of Coreco Mortgage Brokers, said: “Some lenders have a 'collar' or floor below which they will not reduce rates further. Other lenders use their own version of base rate which, although it always has historically, does not have to mirror the Bank of England's rate.

"Borrowers should therefore check the small print of their mortgage carefully."

If you would like to find out how your mortgage provider is planning to do in the wake of the base rate cut, take a look at this table from MoneySavingExpert.com.

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