Bank of England interest rate cut to 0.25%: what does it mean for mortgages and borrowing?

The base rate is back to a historic low of 0.25 per cent. 
The Bank of England's outgoing Governor Mark Carney
EPA

Mortgage rates could be set to hit record lows following the emergency interest rate cut by the Bank of England today in response to the coronavirus outbreak.

The monetary policy committee voted unanimously to cut the base rate from 0.75 per cent to 0.25 per cent to protect the economy against the shock of the rapidly rising threat of a Covid-19 pandemic.

The base rate is now back to the level it sat at from March 2009 until November 2017 in the wake of the financial crash. The base rate then rose to 0.5 per cent before hitting 0.75 per cent in August 2018 – its highest level in almost 10 years.

In a statement today, the Bank said its role is "to help UK businesses and households manage through an economic shock that could prove sharp and large, but should be temporary", in order to bridge the economic disruption that is likely to be associated with Covid-19.

"The reduction in bank rate will help to support business and consumer confidence at a difficult time, to bolster the cash flows of businesses and households, and to reduce the cost, and to improve the availability, of finance."

What does the base rate cut mean for mortgage costs?

Lenders are likely to react quickly to the base rate cut by offering even cheaper interest rates than are currently available, although industry figures have noted that mortgage rates are already at near-record lows.

Lower Swap rates — a forward contract used by companies to exchange interest rate payments with each other — are also tipped to lead to cheaper borrowing.

Mark Harris, chief executive of mortgage broker SPF Private Clients said: “This is a bold and decisive move from the Bank of England. Swap rates have tumbled in recent days and both the reduction in base rate, plus lower Swap rates, will lead to even cheaper mortgage products.

“We would expect five-year pricing to fall close to its previous record low of 1.29 per cent in 2017 (for a five-year fix from Atom Bank). The big question is, could they fall below one per cent?”

0.25%: the new bank base rate after the monetary policy committee voted unanimously to cut it in response to coronavirus
PA

How will this affect fixed and tracker mortgage deals?

Lower interest rates will be good news for home buyers, for people looking to remortgage and for those on base-rate tracker mortgages – which move in line with the Bank of England base rate.

All these groups are likely to be able to make savings thanks to the Bank’s decision.

“For customers with tracker mortgages this rate change will be welcome and reduce their monthly payments very quickly,” said Alex Maddox, capital markets and digital director of Kensington Mortgages.

Most buy-to-let mortgages are interest-only because this is the most tax-efficient way for landlords to operate, so landlords are also expected to see savings in their mortgage payments.

However, the large number of homeowners who have already taken advantage of lower lending rates over the past few years with long-term fixed-rate mortgages will see no change to their finances as a result of the base rate cut while they are still committed to existing mortgage terms.

The surprise cut in the base rate “is unlikely to have a big impact on the property market, as mortgage rates are already at or near record lows and can’t get much lower, and the majority of owners are already locked into fixed-term deals,” said Guy Gittins, managing director of estate agent Chestertons.

He added that today’s cut will be frustrating for savers, who may see the value of their money fall even further as banks and building societies cut interest rates payable on savings accounts.

This will be a particular blow to aspiring first-time buyers trying to save for a deposit on a first home.

Several mortgage lenders have already responded to potential economic shocks by promising mortgage repayment holidays to homeowners whose finances are affected by coronavirus.