Updated 03 December 2020
Two interest rate cuts in a single week have brought the base rate down to a record low of just 0.1 per cent. This could be good news for anyone on a tracker mortgage, first-time buyers and those looking to remortgage. Can you benefit? Article by Nick Green.
Mortgage borrowing rates in the UK are now lower than ever before – close to zero, in fact. Responding to the COVID-19 crisis, the Bank of England (BoE) has made two rate cuts in quick succession, first to 0.25 per cent just before the Budget, and now to 0.1 per cent. And although this is bad news for savers, it could save a lot of money for first-time buyers, remortgagers, and anyone whose mortgage tracks the BoE base rate.
Whether your mortgage repayments will fall depends on the type of mortgage deal that you have. The three types where you may get lucky this time include:
If you have a tracker mortgage, this moves in line with the BoE base rate, and tends to be set slightly higher. Assuming that lenders honour the latest change, the average mortgage (at around £150,000) should see monthly repayments fall by a total of £45 to £50 as a result of the two rate cuts.
If you have a variable rate mortgage – i.e. on the lender’s standard variable rate (SVR) – you may or may not get a lower rate in response to this change, as it’s entirely up to the lender. If your rate does change, you should make similar savings. If yours is a discounted mortgage, this works in a similar way (except your rate will be lower than the SVR). In both cases – variable and discounted – you may still be better off remortgaging to a fixed rate if you can.
If you’re currently on a fixed rate, however, you won’t see any savings yet. But if your initial period is soon coming to an end, you could snap up a much cheaper deal when it’s time to remortgage.
Most mortgage lenders are preparing to drop their rates by at least 0.5 per cent. The majority plan to make this effective from 1 April. It is possible that some will lower their rates by even more.
This is a good question. Assuming you can get a mortgage, your repayments should be cheaper on average, depending on what deal you can secure. However, given the economic fallout of the coronavirus, lenders may be understandably more cautious about who they lend to. If your income or job security is being threatened by the crisis, you can unfortunately expect some tough questions from mortgage providers as to how well you can afford repayments.
This makes it more important than ever to make your mortgage application as strong as you can – particularly if you are a first-time buyer. A good first step is to test your application first in our Mortgage Checklist Tool. This will assess the strengths and weaknesses of your mortgage prospects and identify any areas for improvement, but without leaving any mark on your credit file (so you can use it as many times as you like without risk).
The next step is to contact a mortgage broker. A mortgage broker / adviser can give you a comprehensive assessment of your application and search the whole of the market to find the best available deal for you. This can protect you from having multiple knock-backs from lenders, which themselves can harm your future mortgage prospects. Essentially, a mortgage broker maximises your chances of securing a mortgage first time.
If your current mortgage deal (i.e. the initial period) is coming to an end within the next few months, the timing could be ideal to remortgage. Remortgaging can take up to eight weeks, so it’s best to start thinking about it well in advance. Contact a mortgage broker sooner rather than later, as this will give them a chance to search out the best deals for you.
Bear in mind that the cheapest remortgage deals may take a little time to materialise, as the BoE rate cuts will need to filter through to lenders. Also check whether your mortgage comes with a redemption penalty (i.e. early repayment fee), and find out how much this is. You may be better off waiting until a penalty no longer applies, but your mortgage broker can tell you which option is best. The good news is that if a redemption penalty does force you to stick for a while with your current mortgage, the SVR may be lower now thanks to the rate cuts (though this isn’t certain).
You might want to take advantage of the lower rates to borrow more money against your home. This may be feasible if your property is now much more expensive than when you first took out your mortgage (as the loan-to-value ratio will be more in your favour). That said, the tough economic conditions mean that it may not be the best time to take on more debt. There are also more efficient ways to borrow money – since money borrowed on your mortgage is repaid over a long period, so you’ll end up paying more overall.
A key question to ask your mortgage broker, whether you’re buying a first home, moving home or remortgaging, is how long you should fix your mortgage rate. You can fix rates for two, three, five or 10 years (there are even some 15 year deals), but the longer deals typically offer higher rates and tougher requirements. Calculating what will work out best for you in the long term isn’t straightforward (you need to bear in mind things like arrangement fees and repayment penalties too), so be sure to seek advice.
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