Borrower hopes of cheaper repayments dashed as Bank holds interest rates

Posted 20 July 2016 by Nick Parkhouse

The Bank of England surprised many by not cutting the 0.5% base rate to counteract some of the economic consequences of June's Brexit vote...

Following the outcome of the EU referendum, many experts believed that the Bank of England would cut interest rates in order to support the economy. However, members of the Monetary Policy Committee (MPC) have voted to keep the base rate stable at 0.5%, meaning millions of mortgage borrowers won't see their repayments fall.

Further economic data will be made available to the MPC in August when many experts believe a cut is more likely.

Bank votes 8-1 to keep interest rates on hold

The Bank of England has decided to keep interest rates on hold, dashing the hopes of millions of borrowers that their mortgage payments would reduce this summer.

The MPC voted 8-1 to keep the base rate at its record low of 0.5%, preferring to delay any cut in rates until further economic data is available.

Hetal Mehta, senior European economist, Legal & General Investment Management, says: "We expected that the Bank of England would hold rates for the time being. We believe it is too early for the Bank to have any meaningful data on how the economy and financial conditions are being affected by the confidence shock ensuing from the EU referendum outcome, and therefore too early to calibrate the appropriate policy response.

"We expect the Bank of England will make a more comprehensive assessment in August, and that in the coming months interest rates will be cut by 50bps and further measures such as QE [quantitative easing] and credit easing will be announced."

A rate cut could have benefited five million borrowers

The Financial Times has reported that an interest rate cut would potentially benefit around five million borrowers in the UK. According to the Council of Mortgage Lenders, the total value of variable rate mortgages is around £611bn. This includes both borrowers on tracker rate deals and those on their lender's standard variable rate.

Even if an interest rate cut were to follow in August, experts have warned that this may not translate to cheaper repayments for some borrowers.

Most tracker rate customers will benefit from an interest rate cut as their rate is directly linked to the base rate. Mortgage expert David Hollingworth told the FT: "For most trackers I would say a base rate cut would be effective, but it is worth borrowers checking their terms and conditions."

Borrowers on their lender's SVR are less likely to see a reduction in their repayments, even if the base rate were to fall. This is because banks and building societies have much greater control over their SVR, and don't automatically cut or raise this rate when the base rate changes.


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