The Bank of England cut the interest rate last week to 0.25 per cent, the first change in more than seven years. The move, from a record low of 0.5 per cent to another record low, was widely expected by experts, as the bank sought to stimulate the economy in the aftermath of the UK’s vote to leave the European Union, supported by a new round of quantitative easing.
While savers are set to suffer from the lower interest rate, the news was welcomed by home hunters who already have a deposit saved up, as mortgage borrowers were expected to benefit from the cut. Indeed, the Bank of England has also introduced a fund to ensure that lenders pass on any savings to consumers.
Nationwide Building Society propmtly announced that it will pass on the decrease in full to existing Base Mortgage Rate (BMR), Standard Mortgage Rate (SMR) and tracker mortgage customers, thereby lowering customers’ monthly payments. Nationwide’s new BMR for mortgages reserved before 30 April 2009 will be 2.25 per cent from 1 September 2016 (previously 2.5 per cent) and the SMR will be reduced to 3.74 per cent from 1 September 2016 (previously 3.99 per cent).
Favourable financing conditions have already fuelled activity in the UK housing market, with first-time buyers increasingly taking advantage of affordable opportunities, supported by the the government’s Help to Buy schemes, while remortgaging approvals rose 13 per cent year-on-year in June 2016, according to the IMLA. House purchase approval numbers also bounced back from the low numbers seen in April , with numbers in the first half of 2016 5.5 per cent higher than in the same period of 2015.
Is the UK therefore set to enjoy a long period of low mortgage rates?
The Council of Mortgage Lenders is not entirely sure, as it highlights the array of factors that impact mortgage rates in the country.
“Since the last change in official rate in March 2009, the average mortgage rate has already fallen from 3.8 per cent to 2.9 per cent. This confirms that Bank rate is not the only influence on mortgage pricing; we feel that the mortgage market is at present well capitalised, resilient and open for business. Housing market fundamentals are sound. So, we see today’s cut as a wider reaction to the economic effects of recent political uncertainty,” says CML director general Paul Smee.
Smee notes that while the Bank of England base rate has been at its previous record low for years, mortgage rates have fallen significantly over that period, from an average of 3.8 per cent to 2.9 per cent.
“This is because Bank rate is not the only influence on rates. Funding costs, levels of competition, targeted levels of profitability, and an assessment of current and future market conditions to price appropriately for risk are also relevant factors,” adds the CML.
“Future pricing will depend on all the factors above and is a matter for individual lenders.”
For those on fixed rates, which accounts for around half of all borrowers, there will, of course, be no change to their payments, or no immediate impact. Of the remaining 4.9 million home-owners, over 1.5 million have a tracker rate mortgage, who may see a rate reduction, although some will have a floor below which rates cannot fall. It is no coincidence that fixed-rate products have accounts for 90 per cent of lending in recent months.
“For new borrowers, mortgage pricing is extremely competitive and set to remain so,” concludes the CML. “However, it is worth noting that the Bank has also been urging borrowers to plan ahead for the prospect of higher rates in the future – don’t assume that just because rates are low now, they will necessarily stay that way for a prolonged period.”Google+