The Bank of England cut interest rates for the first time in 76 months to a new record low of 0.25% today.
Base rate had been at 0.50% since March 2009, after the Bank of England cut it dramatically in its response to the impact of the 2008 financial crisis.
The Bank of England acted today to try and support the economy by making the cut due to weak economic data from the latest purchasing managers’ index (PMI) reports, which, along with other data suggests the UK maybe heading for a recession following the Brexit vote on June 23rd.
In its quarterly inflation report, published alongside the rate cut decision, the Bank of England downgraded its GDP forecast for 2017 to 0.8% but maintained the 2% forecast for 2016.
The Bank also resumed its quantitative easing (QE) programme by £60 billion. A new Funding for Lending style scheme worth up to £100billion was also announced.
The interest rate cut was widely predicted by economists and was voted for unanimously by the Bank’s Monetary Policy Committee (MPC).
Council of Mortgage Lenders director general Paul Smee says: “Since the last change in official rate in March 2009, the average mortgage rate has already fallen from 3.8% to 2.9%. This confirms that Bank rate is not the only influence on mortgage pricing; we feel that the mortgage market is at present well capitalised, resilient and open for business. Housing market fundamentals are sound.
What does it mean for mortgages?
There will be no immediate change to the amount you pay on your mortgage unless you are one of roughly 20% of the UK’s 11 million mortgage holders who have a tracker mortgage which changes as the Bank rate does. The cut should mean rates for fixed-term mortgages fall slightly, though they are already at very low rates historically.
Gocompare.com’s head of money, Matt Sanders, said: “For potential homebuyers, a cut in the base rate could be good news. The market is already extremely competitive with mortgage rates commonly available at 2% or less. The news today from the Bank of England should see these deals extended for the next few years.”
A cut in interest rates typically means households and businesses can borrow at a lower rate. However, as rates are already low the scope banks and building societies have to do this is reduced.
In its commentary the Bank of England said: “It is likely to be difficult for some banks and building societies to reduce deposit rates much further, which in turn might limit their ability to cut their lending rates.”
Using house price data from the Office for National Statistics (ONS) a cut in the rate to 0.25% would equal a £22 monthly reduction in the £780 monthly mortgage for a variable rate borrower with a 20% deposit on a 25-year repayment mortgage on an average-priced home of £211,000.
However, if you are on a standard variable rate (SVR) with your lender, about 29% of mortgage holders, when you see this cut depends on if and when and by how much the lender introduces it to their SVR rates. SVR mortgages are ones households often move onto after a fixed term mortgage has ended.
Santander has already announced it will pass on the full cut and other banks are expected to follow.
The governor of the Bank of England, Mark Carney, said banks had "no excuse" not to pass on the cut to households.
The majority of mortgage holders, 46%, are on fixed term products and they will see no change to rates until the product ends. When that happens borrowers can stay on their lenders SVR rate or look for a new fixed term or tracker rate mortgage deal.
A cut in interest rates should benefit first-time buyers by allowing them access to even more competitive deals in the coming months.
Séamus Kavanagh, CEO, at Townends Estate Agents said: “We have seen many first-time buyers already benefiting from low mortgage rates and being able to enter the market, and a drop in rates will provide an additional boost for those who have been sitting on the fence and holding off making a property purchase decision.”
The impact of a rate cut will have little immediate impact on housebuilders but any measure that stimulates demand for new homes is likely to be welcomed.
Brendan Cox, managing director, of Waterfords estate agents in Surrey, Hampshire and Berkshire said: “There is no doubt that confidence has been shaken in the wake of the referendum and nothing impacts the property market more than uncertainty. However, this decisive action, in advanced response to the risk of a downturn, is a positive step in my view.
Despite some homeowners expressing concern over the possible effect of Brexit on the property market, early indications suggest the market is reacting better than expected. To date it hasn’t impacted existing transactions from progressing.
“With the continued imbalance of supply and demand, particularly in and around the Home Counties, we are not expecting to see any dramatic falls in property prices. My advice to anyone who has been looking for a property for a long time and finally found one they like, is to go for it.”
Gwyn Roberts, home quality mark (HQM) project lead said: “We welcome the bank of England’s policy on reducing interest rates as it helps promote stability in the housebuilding sector and stability and confidence is exactly what the sector needs at this moment in time.”