The Bank of England has announced that it will reduce the Base Rate by 0.25%, to 4.75% this month – the second reduction this year. Base Rate was held in September after being reduced in August, which had been the first drop since 2020.
The Bank meets every six weeks to decide what should happen to interest rates. With the aim of keeping inflation to its target, and keeping the wider economy healthy. It was announced in October that inflation had fallen to 1.7%, which is below the 2% target the government sets for the Bank.
The markets had been widely predicting a cut to interest rates today, as continuing to hold rates may have a negative knock-on effect on businesses and households, further down the line.
What’s happened to mortgage rates recently?
We’ve seen mixed behaviour from lenders in recent weeks, with some increasing their mortgage rates, and some decreasing. This is largely because we’ve seen quite a bit of movement in swap rates – the underlying costs of mortgages to lenders – which has meant some have needed to reprice their products to bring themselves back in line with the rest of the mortgage market.
You can check the current average rates for a range of different deposit sizes here.
What do the experts think?
Our mortgage expert, Matt Smith, says: “This Base Rate decision comes at the end of a run of important macro-economic and political events on both sides of the Atlantic. All of this has resulted in a view that Base Rate will be cut at a more moderated pace than previously expected and has been priced in by lenders. Therefore we are likely to see average mortgage rates drift up a little in the short term, before starting to fall back again.”
“Today’s decision will probably help relieve pressure on lenders to increase rates as we had started to see. If the last few weeks has taught us anything, it is that the UK mortgage market remains competitive, but headline pricing will continue to be impacted by events both in the UK and overseas”, he adds.
What does the Base Rate reduction mean for my current mortgage?
Changes to the Bank’s Base Rate can impact how much interest you’ll pay on loans, including mortgages. If you’re on a fixed-rate deal, your monthly payments won’t change until the end of your deal. And if you’re on a tracker mortgage, or a variable rate mortgage that follows Base Rate changes, this month’s Base Rate reduction will mean your monthly payments will take on this drop.
If you’re coming to the end of your fixed-rate mortgage soon, you’ve probably already started to think about the rate you’ll be offered on your next deal.
If you’re thinking of moving home soon, a good way to find out how much you could borrow is to use a mortgage calculator. You can get a personalised result by applying for a Mortgage in Principle, which will take you one step closer to a mortgage offer.
In July 2023, the Mortgage Charter was launched to help those struggling to meet their monthly payments, as well as borrowers who are coming to an end of their fixed rates soon.
The Mortgage Charter encourages lenders to be flexible and offer borrowers the chance to lock in a new deal up to six months before their current rate ends. Of course, borrowers can also look at moving to another lender – commonly known as remortgaging – but this can take longer, as you have to go through a normal lending process, such as income checks, the legal process, and maybe a valuation of your home.
This all takes time, and you would want to make sure you’re looking around a few months before the end of your current deal to avoid falling onto your lender’s on to a Standard Variable Rate – which will cost more than the repayments you’d have made on a fixed rate mortgage. The current average for SVRs is 8.01%.
What could the Base Rate reduction mean for affordability?
Lenders’ ‘stress test’ calculations – which is how they calculate whether someone could afford a mortgage were their repayments to jump considerably – are directly linked to the Standard Variable Rates that we just talked about above.
The ‘stressed rate’ is usually the lender’s SVR, with at least 1% added on top. So, if lenders’ SVRs reduce in line with this Base Rate cut, we might start to see affordability improve, because the stressed amount will now be lower than if Base Rate was at 5%.
What could happen next?
The Bank of England’s Monetary Policy Committee meets every six weeks to discuss and vote on whether rates should go up or down, or stay the same.
History has shown that after interest rates have increased over time, they have remained flat before starting to come down. So while we’re now seeing the beginning of the downward curve, it’s extremely unlikely that rates will drop back to the historic lows we saw back in 2021.
After the Base Rate cut in August, the markets had been forecasting a potential two further cuts before the end of 2024. However, due to other global events which are outside the Bank’s control, this has now fallen back to just one cut, which we’ve seen today. So it’s unlikely we’ll see another cut before the end of the year.
We could see Base Rate fall to around 4% in 2025, which would mean three more Base Rate cuts throughout the next year. Though as always, this could change depending on what happens in the broader economic environment.
The next decision on interest rates will be announced at 12pm on 19 December 2024
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Nigel & Jayne Deekes – Acres Partners
Article curtesy of Rightmove : 7.11.24
