The Bank of England’s Monetary Policy Committee (MPC) has made a significant decision, voting 5 to 4 in favour of reducing the base rate to 5.00% at its recent meeting. This 0.25 percentage point cut marks the first adjustment to the base rate in over four years, ending a year-long pause in interest rate changes.
Factors Leading to the Rate Cuts
Between 2021 and 2023, the base rate experienced 14 consecutive hikes as the Bank of England aimed to address persistently high inflation. By August 2023, the base rate had reached a 16-year high of 5.25%, where it remained until this recent cut. These hikes were a direct response to chronic inflationary pressures affecting the UK economy.
Implications for Mortgage Seekers
For many borrowers, this decision will come as a relief. The mortgage market has shown signs of optimism in recent weeks, with fixed mortgage rates falling steadily. Lenders have been encouraged to re-price their deals positively due to favourable swap rates.
As a result, average two- and five-year fixed mortgage rates have decreased considerably month-on-month for the first time since February 2024. Currently, these rates are at 5.77% and 5.38%, respectively. Moreover, last month saw the brief return of sub-4% mortgages for the first time since April 2024.
However, those looking to refinance will likely find rates higher than the last time they secured a fixed deal. For instance, the average two-year mortgage rate was 3.95% in August 2022, while the average five-year fixed rate was 2.84% in August 2019.
Borrowers coming off a deal this year should be prepared to allocate more of their income to cover higher repayments. With the average Standard Variable Rate (SVR) remaining above 8.00%, securing a new fixed deal could still be more cost-effective than waiting for further reductions while staying on a lender’s 'revert to' rate.
Indeed, the Mortgage Advice Bureau has observed an increase in clients proactively considering their options in anticipation of today’s announcement. The base rate cut is welcome news for the mortgage market, and it is expected to incentivise more people to look for new deals.
Recently, there has been a growing interest in shorter-term fixed deals among borrowers, who appear more willing to review rates frequently, especially if they anticipate further cuts to the base rate in the near future. Additionally, there has been increased interest in tracker mortgages, although these products often come with more restrictions and less flexibility. Prospective borrowers are advised to seek professional guidance to ensure a tracker mortgage suits their circumstances.
Impact on Savers
While the base rate cut is beneficial for borrowers, it presents challenges for savers. Savers will need to closely monitor their existing variable accounts over the coming weeks. Historically, providers have been quicker to pass on cuts to the base rate compared to increases.
For example, in March 2020, the base rate was cut twice, from 0.75% to 0.25% and then again to 0.10%. In the six months following these cuts, the average easy access rate fell from 0.56% to 0.22%.
Despite a year of unchanged central interest rates, variable rates have shown resilience. Currently, the average easy access savings account and ISA pay 3.15% and 3.36%, respectively. Challenger banks have been particularly competitive in offering attractive rates.
Savers seeking guaranteed returns might consider fixed bonds or ISAs. However, they may need to act quickly to secure a good deal before it disappears. While a base rate cut tends to have a more immediate impact on the variable rate market, it can also prompt providers to adjust fixed rates accordingly.
Conclusion
The recent base rate cut by the Bank of England signals a shift in the financial landscape. Borrowers may find this an opportune time to explore new mortgage deals, while savers will need to stay vigilant in managing their accounts. The dynamic market conditions underscore the importance of seeking professional advice to navigate these changes effectively.
Commenti