The Bank of England has cut interest rates, meaning tracker mortgages will fall below 4% for the first time since February 2023.
The reduction in the base rate from 4% to 3.75% will come as no surprise as the cut was widely predicted and will provide a much-needed Christmas boost for many homeowners.
While many thought today’s 0.25% cut was a virtual ‘certainty’, Bank of England policymakers themselves were less certain.
Only five of the nine committee members voted in favor of the 3.75% reduction; the remaining four wanted to keep the rate at 4%.
This comes after it emerged that inflation had fallen sharply in November from 3.6% to 3.2%. Yet it remains a far cry from the Bank of England’s 2%.
In the meantime, borrowers with a fixed or variable mortgage will head into Christmas knowing their repayments will be lower in the new year.
Track mortgage borrowers – how the discount will impact you
According to David Hollingworth, deputy director at a free mortgage broker L&C Mortgagesthe tracker rates are directly linked to the base interest rate and will eventually align with the base interest rate.
He explained that the rate payable on the lowest current tracker rates will fall below 4% for the first time since early February 2023, before the base rate was increased from 3.5% to 4.00%.
For example, Halifax is currently offering a two-year tracker at 0.11% above the base rate, which will drop from 4.11% to 3.86% after a quarter-point cut.
‘That,’ said Hollingworth, ‘will save a borrower with a £200,000 mortgage, over 25 years, almost £28 a month or more than £330 a year.’
He added: “Tracker rates have gradually closed the gap with fixed rate options, but still lag behind the best solutions.
“But with more base rate cuts expected next year, we may see more borrowers wondering whether cutting rates could be a better option in the longer term.
“It is also more likely that trackers will not have to pay early repayment charges, providing additional flexibility. However, there are no guarantees that interest rates will continue to fall and therefore borrowers need some ability to deal with rising payments as interest rates change.”
Variable Rate Borrowers: Will You See a Change?
If you are currently on your lender’s Standard Variable Rate (SVR) you may see a reduction in your repayments, but this is not fully guaranteed.
Hollingworth explained that lenders were not required to pass on a base rate reduction directly through the SVR.
But he said he had seen lenders reduce their SVR as interest rates fell, so cuts were not completely off the table.
With SVR rates hovering around 7% on average, most estate agents, including Hollingworth, advise against them as they do not offer good value for money. Switching is usually a smart move.
Fixed rate borrowers – good news for first-time buyers or switchers
If you’re on a fixed rate deal, your rate is locked in, so today’s cut won’t make any immediate change.
However, if you need to take out a new mortgage or buy a home, you’ll reap the benefits of falling interest rates.
Lenders have been pricing in today’s cut for several weeks and the average fixed interest rate is now well below 5% – at 4.99% according to Moneyfacts.
Hollingworth thinks this trend will continue. “Fixed rates have improved substantially and have improved choices for those still moving toward the end of an ultra-low five-year fixed rate,” he said.
“Lenders are competing hard and there could be more room for lenders to improve their rates in the new year as they look to get off to a good start.
“Although interest rates are already pricing in further rate cuts next year, there is still room for market expectations that interest rates will fall further.
“This makes it even more likely that borrowers will need advice to help them find the right option and keep an eye on a fast-moving market.”
What impact will the cutbacks have on starters?
If you are a first-time buyer looking to purchase your home in the new year, today’s interest rate cut will come as positive news.
It means tracker mortgages will be more competitive and fixed-rate deals are likely to be cheaper than they were a few months ago.
However, with more choice it means that it is wise to speak to a mortgage adviser as this will help you find the best possible rate and deal for your circumstances.
Paul Broadhead, head of mortgage and housing policy at the Building Societies Association, said: “With more than half (54%) of potential first-time buyers saying mortgage affordability is a major barrier to home ownership, today’s decision to cut bank rates will be welcome news for many.
“Abolishing a 0.25% discount on bank interest rates is not a panacea, but it is an encouraging sign that the pressure on starters is starting to decrease.
“Lower rates, in addition to recent regulatory changes, a revision of the Lifelong Individual Savings Account (LISA) and continued product innovation from building societies should jointly help restore confidence that home ownership can once again be a realistic goal.”