Interest rates have been reduced by 0.25% to 5%, a move long awaited by borrowers.
The Bank of England’s first base rate cut since 2020 will come as a huge relief to people with mortgages who have been struggling with higher repayments since the start of the rate hike cycle.
But how much difference will it really make to household budgets?
Lenders have already priced in some potential interest rate reduction on their fixed-rate mortgages and as such, prices have fallen in recent weeks.
Meanwhile, as news of the rate cut was announced, some lenders confirmed that their variable interest rate – which is set according to the Bank of England (BoE) – would be reduced accordingly.
Anyone who has already taken out a fixed rate mortgage will see no difference in their repayments.
So the general sentiment from experts is that the news is positive, but it won’t make a radical difference to people’s mortgages.
Paul Broadhead, head of mortgage and housing policy at the BSA, said: “Today’s cut in bank rates marks a turning point in what has been a very difficult two and a half years.
“The news will be welcomed by many homeowners and aspiring first-time homebuyers.
“While a 0.25% cut in interest rates to 5.00% will not have a significant impact on the overall cost of mortgage payments, it is likely to boost consumer confidence and lead to an increase in housing market activity.”
Meanwhile, Stephanie Daley, director of partnerships at Alexander Hall, said this would help ease affordability constraints for many people.
“The Bank of England’s decision to make cuts presents significant opportunities for homeowners and homebuyers,” she said.
“While mortgage rates may not fall immediately, this change should help release pent-up demand in the market, restoring confidence among buyers and people looking to move who have postponed their plans due to higher rates.
“Over the past three years, many customers have opted for a longer mortgage term, especially movers and refinancers.
“The drop in base rates should ease concerns about affordability, making longer-term loans, which are now available for up to 40 years, more feasible and attractive.”
Alice Haine, personal finance analyst at Bestinvest by Evelyn Partners, thought start-ups would still face challenges. “While a 25 basis point rate cut combined with lower inflation will improve the affordability barriers faced by many first-time buyers,” she said, “house prices remain alarmingly high relative to incomes.
“A typical earner buying a typical first-time buyer property is looking at a monthly mortgage payment that eats up almost 40% of their take-home pay – a huge jump from the pre-pandemic figure of 28%.
“For existing borrowers, the rate cut is great news for those who have a tracker mortgage, but it is less of a boon for existing borrowers who may be locked into expensive fixed rate deals that still have some time to go, or for those who are ultra – close cheaply. , fixed rate deals entered into before the BoE started raising rates will still see an increase in repayments.”
Will there be more interest rate cuts in the future?
Interest rates started rising from their low of 0.1% in December 2021 and there were thirteen more consecutive increases culminating in August 2023, with rates reaching 5.25% as the BoE tried to keep inflation under control.
The BoE’s Monetary Policy Committee (MPC) has voted at every meeting since to keep the base rate at 5.25%. But with inflation reaching the 2% target level in the spring, markets expected a rate cut during the summer.
At today’s MPC meeting, five of the nine-member committee voted in favor of cutting interest rates, while four favored keeping interest rates at 5.25%. It was a close call.
What are the chances of a new rate reduction?
Haine said: “Inflation has the potential to get a boost later in the year as the 2023 fall in energy prices falls outside the annual equation, while Chancellor Rachel Reeves’ public sector pay increases are going up could also have an inflationary impact, so the BoE may be cautious about the timing of its next rate hike.”