In August 2016, the Bank of England slashed the UK’s base interest rate to 0.25%, in an attempt to inject some confidence into the economy following the UK’s decision to leave the European Union. This rate is the lowest on record.
Mortgage holders in the UK should be braced for a change in their repayments. If you have a tracker mortgage, you will see your repayments fall because these plans automatically adjust to match the Bank of England’s base rate. But is this always the case? Here’s why sticking with your fixed rate mortgage may be a better option in the long-term…
Banks do not have to pass on the interest rate cuts straight away
Although tracker mortgages are supposed to automatically adjust when the Bank of England’s base rate changes, this is not always the case. Lenders have the ability to delay in passing on the drop to their customers.
For example, shortly after the cut was announced, The Telegraph reported that one of the country’s biggest lenders had not set a date for passing on the reduction in interest rates. It’s thought that these delays are down to the fact that banks would suffer a huge drop in their profits as a result of the cut, because a lower interest rate would equal lower monthly repayments on tracker mortgages.
In the same article, The Governor of the Bank of England, Mark Carney, said that banks had “no excuse” not to pass on the cuts to customers, however, it seems many lenders are keen to take a closer look at the situation before deciding on a plan of action.
Standard Variable Rate mortgage holders face a period of uncertainty
Despite the delay, tracker mortgage holders will enjoy a drop eventually, but SVR mortgage holders will be forced to rely on their bank’s discretion. Banks do not have to pass on the cuts to SVR mortgage holders, and some may even have a lower interest rate limit that is still higher than the Bank of England’s base rate, so it’s worth having a read through your mortgage’s small print.
Fixed rate mortgages should be more cost-effective in the long-term
Although fixed rate holders will not see their repayments fall, this plan does have a host of other benefits. Namely that you know exactly how much you’ll be paying each month. Interest rates could fall or rise – meaning that tracker mortgage holders are at the mercy of the Bank of England over how much they’ll pay each month. If you’re a fixed rate holder, you will not have this problem – making it easier to plan your finances.
Fixed rate products are currently cheaper than ever, and with so much uncertainty surrounding the economy, having the protection and security of a fixed term can be very reassuring. At Enness, we understand that the complex issues the country is going through can make choosing the right mortgage difficult, so we are here to help. We’re on hand to offer expert mortgage advice, however complex your situation, so you can find the very best solution to your circumstance and future aspirations.