On the 4th of this month, the Bank of England announced that it was cutting interest rates to 0.25%. Interest rates have been at a record low of 0.5% for more than seven years. Although the Bank of England’s Governor Mark Carney has said he was not a fan of negative interest rates, he has hinted that another drop may happen in the future. Deputy Governor Ben Broadbent has also suggested a drop would be likely if the economy were to unfold in line with forecasts.
Since 2014, nine out of ten people who have taken a mortgage have opted for a fixed rate deal. Now, with interest rates cut to near rock bottom rates, those stuck with a fixed rate deal may be tempted to switch to a lower rate – even if this means paying a penalty.
Fixed rate mortgages
The Council of Mortgage Lenders has indicated that around half of the mortgages currently held are at fixed rate, with a far higher proportion among more recent applications. 91% of mortgages arranged in May were at fixed rates.
Whether it will pay to switch depends on the deal a borrower has signed up for. Each borrower would need to look at how much money they would save if they moved to one of the low rate deals currently available, and how much would be lost to an early repayment charge. It is important to factor in arrangement fees on top.
About one in five mortgages are trackers, and these typically follow the Bank rate. Borrowers should see a drop in their mortgage payment thanks to the Bank’s announcement – but only if their lender has agreed to pass on the savings to its customers. Mark Carney wanted that there was “no excuse” for lenders not to do so, and many of the top lenders have already announced proposed rate cuts. However, Borrowers should check to see if their lender has indeed passed on the savings and if not, check their mortgage agreement to see if there is a rate floor – a minimum rate beyond which their rates cannot fall. If their rate is already at the lowest it can be, it may pay to switch deals.
Standard variable rate
Once a special deal (such as a five or ten year fixed period) ends, borrowers will revert to their lender’s standard variable rate. Some banks have already announced that their standard variable rates (SVR) will be reduced shortly – including Barclays, HSBC, Natwest and Santander. However, the average SVR was already at 4.8% before the Bank’s announcement which is much higher than many of the deals on offer. Right now, the average five year fixed rate is just 3.08%.
Almost a third of borrowers are on SVRs at this time. If you have been switched to your bank’s SVR or are due to switch soon, it pays to look at the current deals on the market and weigh up whether you’d save money by switching – even if your mortgage is subject to an early repayment penalty. A switch from an SVR to a rate that is just a couple of percentage points lower could make a substantial difference to your monthly payments.
However, in addition to calculating the overall cost (i.e. early repayment penalties and arrangement fees) you will also need to consider the more stringent affordability tests that were introduced following the Mortgage Market Review. These could prevent you from moving to another lender, even if your repayments would be lower.
Could you save?
If you are wondering whether you should stick or switch following the cut to the Bank of England’s interest rate, why not contact our property team for a quick chat, without obligation. We can put you in touch with a financial advisor who will look at your current deal and advise if you might be better off with a different mortgage product.