The recent 0.25% drop in the Bank of England base rate made on 1st August was far from a foregone conclusion with some financial journalists believing the rate was actually going to go up!
The European Central Bank beat us to the draw by making their base rate cut in June, however, the US Federal Bank’s decision is still pending. Both will continue to influence us along with our own inflation rate and Government policy.
How fragile is this downward movement in interest rates?
There is much speculation in the press of a possible additional drop before the end of the year. With the Bank of England’s monetary committee meeting three more times before the end of the year (19th of September, 7th November and 19th of December) we shall have to wait and see how the US election on 5th November and our new government affects things.
Most of the press and consumers hope for a further rate reduction, bringing the base rate down to 4.75%. The markets are forecasting a 4% rate by the end of 2025 and the long-term range of normality is 3.5%, according to the ‘This is Money’ podcast from Friday, the 2nd of August.
What does the drop in interest rates mean for your mortgage and savings in the bank? Let’s evaluate both….
Firstly let’s look at mortgages…
Not all mortgages are linked to the Bank of England base rate in the way you might think. Fixed rates are dictated mostly by swap rates, the rates that big institutions buy and sell money to each other. However, tracker mortgages are normally linked to either the bank’s own or the Bank of England base rate, so when these cuts happen mortgage holders with trackers will feel the savings.
It is worth noting that according to the homeowners alliance by the end of 2024, there will be between 1.5 – 1.6 million homeowners in the UK that have come to the end of their fixed-rate mortgage deal. So what will be waiting for them? I’m seeing Standard variable rates as high as 8.16%. That’s an awfully big hike from December 2021 when the average was just a mere 4.4%, so the urgency to sort a new deal is pretty great at the moment.
If you are in this position, seek professional independent mortgage advice asap to ensure you do not see a huge rise in your repayments when your deal ends.
A small lender rate war
We are witnessing a small lenders rate war, so could this gain momentum? In July I saw my first sub 4% fixed for some while, that is of course, if you have 40% equity to invest in your home. Rates are going down but there is no guarantee that this will continue. However at the time of writing (Aug 2024) 4 of the biggest 6 mortgage lenders in the UK are now offering 5-year fixed rates at this level.
What will each 0.25% Bank of England base rate reduction mean in your pocket?
With a mortgage size of £400,000 and 20 years remaining on your term if you hold a tracker rate of 5.84% this latest rate reduction of 0.25% would bring the rate down to 5.59% and save you £56 per month*. With meaningful savings like this, anyone on a tracker rate will be very interested in forecasting where rates are going.
When should you fix your mortgage?
Much like trying to play the market, trying to guesstimate if mortgage rates are going to keep going down or go up again is hard without a crystal ball. Taking the best rate available with your equity and income at the time you need it, and is affordable to you should be the deciding factor. Remember, always take advice, because a professional can guide you towards a good rate with reasonable costs and fees.
Overall I feel optimistic that we’re heading back to some more manageable rates. However, I feel the heady, extraordinary rates of the past will not be returning. Do not expect a 1% interest rate at any time in the foreseeable future.
Now let’s look at savings…
It’s less good news for savers. Those relying on bank interest rates for their cash savings will start feeling those rates fall.
According to money.co.uk, the best instant access account offers 4.91% interest with notice accounts a little higher at 5.21% and a one-year fixed bond at 5.2%.
So if you’re looking to secure these kinds of rates I would move quite fast as I feel that although you might be benefiting from the fall in mortgage rates this will correlate to cash-saving rates falling too. While I fully understand the hassle switching your current account can create, please don’t just leave deposit savings in the same account! Regularly check which account could offer you a better rate. This goes for cash savings and cash ISAs too.
It doesn’t matter if you are a borrower or a saver things will continue to change over the next 12 months. Keep in touch with your Legal & Medical adviser to fully understand what it all means for you and your finances.
The concepts and suggestions in this article must not be viewed as advice. As always we recommend you approach a financial adviser who will take your circumstances into full consideration before providing advice.
Always remember your home may be repossessed if you do not keep up repayments on your mortgage.
*Figures calculated using the money-saving expert mortgage calculator.