Published on: 30th June 2020
In March, the Bank of England cut interest rates to an all-time low. While for savers it means interest earned will be lower, it could be good news for those paying a mortgage.
The Bank of England’s Base rate has been at a low since the 2008 financial crisis when they were slashed to stimulate economic growth. However, in 2017 and 2018, small increases were made, taking the Base rate to 0.75%. With signs of a recovery on the horizon, there were suggestions that the Base rate would start to gradually increase this year.
However, the Covid-19 pandemic meant the central bank instead opted to take swift action in the opposite direction in order to support economic activity. In March, it decided to cut the Base rate twice, bringing it to 0.1%, the lowest it has ever been. For savers, it means the interest on savings has been cut even further. But for borrowers, including mortgage payers, it could mean that your outgoings have fallen too.
The immediate benefits of lower interest rates
Whether you immediately benefit from the lower interest rates will depend on the type of mortgage you currently have.
Tracker: A tracker mortgage follows the Base rate set by the Bank of England. As a result, if you have this type of mortgage the level of interest, and therefore monthly repayment, you pay will have fallen. A tracker mortgage is usually the Base rate plus a defined amount, such as 2%. So, in this case, your new interest rate would be 2.1%.
Variable: With a variable mortgage, your interest rate follows the rate set by your lender. This typically follows the same pattern as the Bank of England, though figures may be slightly different. Therefore, if you have a variable mortgage you should also see payments decrease.
Fixed-rate: With a fixed-rate mortgage the level of interest you pay is set for a defined period of time, usually two, three, five or ten years. During this time your interest won’t increase, but likewise, you don’t benefit from the fall in the Base rate either. Your mortgage repayments will remain the same. If your current mortgage deal is almost finished, you may have the opportunity to cut the rate by swapping to a new deal.
When you first look at the change in interest rates, it can seem like they won’t have much impact on your outgoings. But even a small adjustment can have a big impact, especially if you still owe a significant amount on your mortgage or a long term remaining.
Let’s say you have £200,000 remaining on your mortgage, which has a term of 25 years:
- An interest rate of 3.5% would mean monthly repayments of £1,001
- Now if the interest rate was cut to 2%, the monthly repayment would fall to £848, saving you more than £150 a month
Whether that saving would mean more disposable income or the ability to add more to your retirement pot, it can help improve your lifestyle.
Reducing the overall cost of your mortgage
The impact of reduced interest has an even larger effect when you look at the savings over a full mortgage term. Taking the example of £200,000 left to pay over 25 years above:
- With a 3.5% interest rate, the total cost of the mortgage would be £300,274
- With the interest rate reduced to 2%, this falls to £254,313, a saving of almost £50,000
So, if you’re still paying a mortgage, the new low interest rates are something that should be celebrated. They could mean you save money overall too.
Should you search for a new mortgage deal now?
Whenever interest rates fall, homeowners often wonder if they should search for a new deal and whether interest rates will fall any further.
While interest rates have never been this low before, we can’t say for certain that it won’t fall further into negative territory. It’s something that other central banks, including the European Central Bank, have introduced in the past to stimulate the economy. The action the Bank of England takes will depend on the longer-lasting effects of the Covid-19 pandemic.
So, should you search for a new deal? That depends on what deal you already have and your priorities.
Should the interest rate begin to rise, those on a tracker and variable mortgage deals will find their monthly outgoings increase. As a result, you may be thinking about using a fixed-rate deal to secure the interest rate for a defined amount of time. But on the other hand, if they fall or remain at 0.1% for an extended time, a fixed-rate deal could end up costing you more. It’s important to look at your finances and priorities; do you value security and knowing what you’ll pay each month, for example?
There’s no right or wrong answer, but if your mortgage deal is coming to an end, now is a good time to see what other lenders are offering and even speak to your own provider to see if you can secure a lower interest rate. If you’d like to discuss your mortgage needs and what the new low Base rate means for you, please get in touch.
Please note: Your home may be repossessed if you do not keep up repayments on a mortgage or other loans secured on it.