It was a close call when the votes were cast by the Monetary Policy Committee (MPC), but the latest interest rate drop could help to ease conditions for borrowers and boost the housing market.
Today’s announcement from the Bank of England that the base rate would be brought down by 25bps to 4% wasn’t necessarily the predicted outcome after June’s unexpected inflation increase and a general faltering in economic performance.
However, the hope is that cutting rates will boost the economy and encourage more growth, and for borrowers it is a move in the right direction which many predict will be followed by at least one more reduction before the end of the year.
Any borrowers who are on a tracker mortgage – which follows the movements of the Bank of England base rate – will now see their rate fall and their monthly costs come down, which figures from UK Finance reveal could reduce the typical monthly payment by around £29. Over the course of the year, this adds up to an almost £350 saving.
Those on their lender’s standard variable rate (SVR) – which tends to be much higher than fixed rate options – will also likely see a fall in their monthly mortgage payments, although by a more modest £13.87 per month according to UK Finance (£166.44 per year).
However, as Rachel Springall from Moneyfactscompare points out, there is a “clear financial gain for borrowers to shift from a variable rate mortgage onto a cheaper fixed rate”, with the typical SVR currently at 7.42% while interest rates on fixed mortgages are hovering around 5%.
Interest rates boosting buyer confidence
Higher interest rates have been one of the major factors behind a more cautious approach to the housing market over the past couple of years. Borrowers have struggled more with affordability, with many less keen to stretch themselves when house price growth slumped last year.
However, with five interest rate cuts over the past year, alongside an accelerating property market and a more optimistic financial outlook overall, the latest cut to 4% is likely to provide further impetus to spur buyers into action.
This viewpoint is shared by Matt Thompson, head of sales at estate agency Chestertons, who commented: “As the economy has been showing signs of slowing and inflation remains elevated, it was widely expected for the Bank of England to cut interest rates today.
“Whilst the reduction might not meet expectations of house hunters who have been hoping to see sub-4% rates this year, it will encourage many to go ahead with their property purchase.
“We have already seen a return in buyer confidence last month as more properties were put up for sale which created a larger selection of homes to choose from. Lower interest rates, even if reduced by just 0.25 percentage points, will only boost buyer motivation over the coming months.”
Lenders already springing into action
Even before the latest base rate cut, lenders had already been putting better products on the table, with rate cuts and an expansion in the number of deals on offer.
This applies to both the residential market and buy-to-let, with landlords also able to secure much cheaper fixed-rate deals now than they could a year ago.
The good news for borrowers is that as lenders compete for customers, interest rates on mortgages could fall even further.
Nicholas Mendes, mortgage technical manager at John Charcol said: “Mortgage rates have been edging lower in recent weeks, helped by falling swap rates and a fresh price war among lenders.
“Many banks are off their annual targets, particularly on the purchase side, so they’re sharpening rates to compete for remortgage business instead. That’s why we’ve started to see a handful of five and two-year fixed rates priced below 3.8%, even as inflation remains above target.”
According to Paul Noble, CEO of Chetwood Bank, today’s rate cut announcement is likely to be particularly welcome news to property investors targeting the next addition to their portfolio.
He said: “Today’s decision should be seen as a green light by investors. Rates are now far below their peak, and the lending markets should respond in turn. Pent-up demand can now be released, and we should expect activity levels to rise in the aftermath of today’s news.”
