The Bank of England has cut interest rates from 4.25% to 4%. It is the fifth reduction in a year and takes rates back to where they were in March 2023.
Will my mortgage get cheaper?
For the vast majority of borrowers the answer is no: more than 7.1m (85%) of Britain’s 8.4m existing residential mortgages are on a fixed rate, which means monthly repayments will stay the same.
However, the reduction will translate into lower borrowing costs for the 590,000 homeowners with a base-rate tracker mortgage. The rate they pay will fall, in line with the Bank’s cut. The banking body UK Finance reckons a typical tracker-mortgage customer (with an outstanding balance of just under £140,000) will see monthly payments fall by £28.97 as a result of Thursday’s decision.
The 540,000 borrowers on their lender’s standard variable rate (SVR) will have to wait and see. Although it is likely that lenders will reduce their SVRs, they are not obliged to do so. The average amount outstanding on an SVR mortgage is smaller, so UK Finance estimates a typical saving of £13.87 a month if lenders follow the Bank’s cut in full.
About 900,000 fixed-rate mortgage deals are due to end in the second half of this year. Depending on what happens with mortgage rates, those coming off five-year deals could face a big jump in payments when they switch to a new product.
What about savings rates?
The returns on savings are generally not explicitly tied to thebase rate, but Thursday’s reduction is likely to be passed on to many savers who have easy-access accounts and or other accounts without fixed interest rates.
On Thursday morning, before the rate cut, the average easy-access savings rate was 2.67%.
The “best buy” easy-access accounts pay a lot more than that. Top payers include the savings and investment app Chip and the bank Chase, which at the time of writing had accounts paying 5.1% and 5% (both these rates are bolstered by bonuses).
Fixed-rate savings bonds involve tying up your money for between six months and five years, and typically offer some of the highest rates. On Thursday morning the average rate on a one-year, fixed-rate savings deal was 3.99%, according to Moneyfacts.
At the time of writing, top-paying one-year fixed-rate bonds such as those offered by Union Bank of India (UK) and Vanquis Bank were paying a rate of 4.47% and 4.44% respectively.
What does the rate drop mean for new mortgage deals?
Earlier this year there was a mortgage price war, with lots of lenders cutting the cost of their new fixed-rate deals.
Things have calmed down a little, though the typical cost of a new deal is still on a downward trend: on Thursday morning, the average five-year, fixed-rate deal was priced at 5.01%, while the average new two-year fix was at 5%, the data firm Moneyfacts said. At the start of June these were at 5.09% and 5.12% respectively.
This is the first time since September 2022 that the average two-year rate has dipped below its five-year counterpart and indicates something of a “return to normality” for home loans. It was always traditionally more expensive to secure a longer-term fixed mortgage.
“Mortgage rates have been edging lower in recent weeks,” says Nicholas Mendes, at the broker John Charcol, adding: “We’ve started to see a handful of five- and two-year fixed rates priced below 3.8%.”
At the time of writing there were two-year fixed-rate deals aimed at homebuyers available from Santander and NatWest priced at 3.73% and 3.77%, for those able to stump up a big deposit.
For the borrowers whose sub-2% deals are coming to an end this year and who will need to take out a new product, the gap between old and new repayments is still significant, “but it’s narrowing”, says Mendes. “The payment shock is nowhere near what we were seeing 12 to 18 months ago.”
Should I go for a fixed-rate or a tracker mortgage?
Most experts expect more interest rate cuts, but the split vote at the Bank of England has changed the outlook a bit. On Thursday morning, the financial markets were anticipating a further quarter-point reduction (in addition to Thursday’s) by the end of the year and then another one by next June.
After details of how the monetary policy committee’s 5-4 split vote emerged, the markets trimmed their expectations: they now anticipate a further quarter-point cut by next February. Some believe this could come in December.
That changed outlook is worse for mortgage borrowers hoping for lower rates. Some buyers and those remortgaging may now lean towards a base-rate tracker so that they can benefit from lower payments in future.
However, as well as offering certainty, fixed rates are also typically cheaper than trackers at the moment.
“Two- and five-year deals are very closely priced. Some borrowers want flexibility if rates fall again, while others prefer the certainty of locking in for longer,” says Mendes. “It’s less about timing the market and more about what fits your plans.”
