Bank of England drops base rate to 0.25%

MPCThe Monetary Policy Committee today dropped Bank of England Base Rate to 0.25%

What the market has done (5th August 2016)

The following Lenders have said they are cutting their:

Tracker Rates Mortgage Changes

  • Barclays – now for new customers, 1st September 2016 for existing customers
  • Coventry BS from 1st September 2016
  • Halifax from 1st September 2016
  • Nationwide BS from 1st September 2016
  • Santander from 1st September 2016
  • Virgin Money – now for new customers, 1st October 2016 for existing customers

Standard Variable Rate (SVR) Changes

  • Barclays – dropping by 0.25% – now for new customers, 1st September 2016 for existing customers
  • Coventry BS – dropping by 0.25% from 1st September 2016
  • Nationwide BS – dropping by 0.25% from 1st September 2016
  • Santander – dropping by 0.25% from 1st September 2016
  • Virgin Money – dropping by 0.25% from 1st September 2016

No news yet on anything from Skipton or Nat West, no news on SVR from Halifax

Why did the MPC reduce rates?

The economy following the Brexit Vote is full of uncertainty.

Uncertainty leads to inaction. Inaction means few new investments in business expansion. Lack of expansion means lack of jobs, means lower tax take.

The idea is to make it less expensive for business to invest money in building new shops and factories and investing in research and development to stimulate the economy.

Will it work?

The MPC have made an educated guess that this move will help the economy, but no-one can be sure exactly what the level of fear is out there. Perhaps this will bring a measure of stability, perhaps it is still not enough.

How long were Bank of England base rates unchanged?

Bank of England base rate has been set at 0.5% for 89 months, since the peak of the market problems following the crash of several major banks in 2008/2009. This level of stability in Bank of England base rate is unprecedented when you consider that the longest period of settled rate post-war was previously 18 months.

Why reduce BOE base rates now?

Having seen the appetite for businesses to invest in the UK severely damaged during 2016, Mark Carney, the Gov of the Bank of England and his team have seen fit not to delay.

The alternative would be to wait and hope. Given we are in a totally new situation for the Country, and indeed for Europe, the feeling clearly is that something has to be done.

What does a redudction on BOE Base Rate mean for mortgage holders?

People are aware that changes in Bank of England base rate mean changes for holders of mortgages and that will be the case here.

What happens to your current mortgage, or future mortgage options depends on the kind of mortgage you hold?

Banks and interest margins

One of the key profit generators for Banks is the difference between the interest they pay on money held for savers, against the interest they charge on money lent to borrowers – the margin.

The difference between the two is gross profit for the Bank.

The higher the base rate the easier it is to generate profit between the saving and borrowing rates for the Bank.

Banks typically use changes in base rate to squeeze in some extra margin for themselves in order to maintain profitability. We can expect them to do so in this current round of changes as they are already under pressure given little room for margin in the rates are some seven years.

Therefore borrowers should not expect to see the full base rate cut reflected in their mortgage rate.

In fact some mortgage borrowers will not see a change at all, and here is why.

Fixed Rate Mortgage Holders

Fixed rates on mortgages are not set by the Bank of England. Fixed rates are a reflection of the costs at which Banks lend to each other. Therefore lending for new mortgage holders on fixed rates may move at some point, although we already have the most competitive fixed rates on mortgages we have ever seen.

Holders of fixed-rate mortgages will usually have taken these rates to take the uncertainty out of their monthly mortgage payment, this is the case here. If you have a fixed rate mortgage your monthly payment will not change as a result of this move by the Bank of England.

Tracker Rate Mortgage Holders

Tracker rate mortgages track either the Bank of England base rate, or LIBOR rates.

Libor rates are rates which international banks lend to each other and are set by the banks. They may be influenced by the Bank of England base rate but are not tied to it. Therefore mortgage borrowers with Libor linked mortgage products will need to wait to see if they benefit.

Holders of tracker rate mortgages will see an immediate reduction in their pay rates in line with the Bank of England reduction. This is one of the key benefits of a tracker rate mortgage.

Not all tracker rates are fixed to the Bank of England base rate. Some lenders such as Barclays, and Coventry building society, set their tracker rates against their own base rate which is set internally. The base rates of these lenders have always mirrored the Bank of England rate, although they do have the option to make their own decisions here.

Unsure about your mortgage options?

If you are worried about your best option for your mortgage going forward speak to our team for help and guidance.

What about savers?

As has been the case over the last seven years, savers will not benefit from this move. Lower interest rates mean lower returns for savers, and banks adjust savings rates to assist their profit margins as outlined above.

What next?

Next month there is another MPC meeting to discuss base rate, and again the month after that. If this current measure proves effective, rates may be held, or perhaps, in time, moved back to 0.5%.

It seems however that we we are in for a protracted period of financial uncertainty due to Brexit and this story most likely has several chapters.

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