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Bank of England cuts interest rates to 0.25%

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The Bank of England (BoE) has cut interest rates to a historic low of 0.25 per cent, with homeowners and buyers set to benefit from a reduction in mortgage payments as a result.

The move from the Monetary Policy Committee (MPC) – headed up by the Bank’s governor, Mark Carney – is intended to boost the UK economy and will affect families and their finances across the UK.

For those purchasing a house or moving to a new one, home loans will be directly affected, with an immediate reduction in the rates for tracker mortgages, which generally move in parallel with the base rate.

Lowest mortgage rates

Before the rate cut, UK homeowners and potential buyers were already benefitting from some of the lowest tracker mortgage rates ever, with HSBC offering a lifetime tracker at 1.49 per cent above the base rate – something that will now fall from 1.99 per cent to 1.74 per cent.

Nationwide’s two-year deal, meanwhile, is tracked at 0.94 per cent above the base rate; a deal that will drop from 1.44 per cent to 1.19 per cent following the BoE’s cut.

Figures from the Council of Mortgage Lender predict that a rate cut will be good news for borrowers, who will save £26 a month on a £200,000, 25-year repayment mortgage, while Office for National Statistics data indicates a monthly reduction of £22 on a typical mortgage.

Although the number of homeowners taking out trackers mortgages has fallen in recent times in favour of fixed-rate deals, these have also hit all-time lows. Recently, Coventry Building Society launched the cheapest ten-year fixed rate deal in the UK at 2.39 per cent, while HSBC has a two-year deal available at 0.99 per cent.

Market reaction

A reduction in the base rate had been expected following the UK’s decision to exit the EU in June’s referendum, and although the widely predicted cut of 0.25 per cent did not occur in July, as expected, the MPC has now voted to drop interest rates to their lowest recorded level.

Many analysts have reacted positively to the first decrease in interest rates for seven years, which comes less than a month after Theresa May became the new UK prime minister and just six weeks after the Brexit vote.

Moneyfacts has previously said that the only way is down for mortgage rates, particularly as increasing competition from lenders boosts the number of offers flooding into the market.

It is now expected that the reduction in rates for tracker mortgages will see lenders reduce fixed-rate deals to offer even more competition. There has been speculation that a sub-one per cent deal could be commonplace before the end of the year, rivalling HSBC’s offer as the cheapest on the market.

For lenders, a reduction in the base rate will also reduce funding costs, which will make it more economically viable for them to offer low-rate deals to existing homeowners and first-time buyers.

Future changes

There is also an opportunity for rates to be cut further still, with Mark Carney announcing a raft of measures that are in large part a reaction to the Brexit vote, including £100 billion of new funding to banks to help them pass the base rate cut on to the real economy.

The governor noted that half of all mortgages are on floating rates, along with 80 per cent of bank loans, and so any impact will be felt immediately. He also pointed towards future rate reductions, noting that the majority of MPC members would support this.

Although describing its latest package as “timely, coherent and comprehensive”, the BoE said that all measures have scope to be increased, which could see the base rate fall further and mean even more low-rate mortgages are introduced in the near future. 

For more information on how interest rate falls could affect your family’s finances, head to our mortgage calculator, created with the Mortgage Advice Bureau, to work out the best deal for you.


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