At the beginning of August 2016, the Governor of the Bank of England slashed the UK’s interest rate to its lowest level since 2009 – 0.25%. This was done to try and stimulate the slowing economy in the wake of the UK’s vote to leave the European Union. While this may be bad news for savers, because the interest payments on their pot will reduce, not everyone in the country will be affected negatively. Mortgage holders may find they suddenly have more disposable income each month.
How do interest rates affect mortgages?
Generally, when the interest rates are cut, your monthly mortgage payments will decrease – this is great news for borrowers because they will have extra money in their pockets at the end of each month. However, whether mortgage holders will see a reduction in their payments will depend on their lender and the type of mortgage they have – some will not see any cut in their monthly outgoings.
What kinds of mortgages will be affected?
The two most common types of mortgages in the UK are fixed-rate and tracker. Which type of plan you have will depend on how much you will be affected by the cut in interest rates.
If you have a tracker mortgage, your payments will likely fall because these plans automatically adjust to get in line with the Bank of England’s base rate. However, when the interest rates climb again, the monthly payments on these mortgages will start to increase.
Those with a fixed-rate mortgage are unlikely to see much change in their outgoings because the rates will stay the same for the duration of the plan. While this may mean fixed-rate borrowers will have to pay more than a person on a tracker plan at the moment, it also means that they will be protected from rising payments once the interest rate is increased again.
Do banks have to pass on the cuts?
Again, this will depend on your mortgage. Banks are obligated to do so when it comes to tracker mortgages. However, the Telegraph reported that those on variable mortgages might have to wait to see a reduction in repayments because lenders often delay on passing on the cuts, or use their adaptation of the Bank of England’s base rate. This means that borrowers may pay more or less depending on the policy of the lender.
This is why it’s important to check the terms and conditions of your plan before you decide which option to go for.
With the economy experiencing some turbulent times at the moment, thanks to Brexit, choosing a lender like Enness Private can help you get the best deal on your mortgage. Whether you’re operating on a buy-to-let or residential basis, our expert advisors have years of experience in dealing with clients with complex financial situations and will assess your circumstances to find you the best possible pricing structure.