Base rate reaction | What impact on mortgage rates?
The Bank of England cutting rates by 0.5% (to a joint record low of 0.25%), is clearly a coordinated effort which should be seen in the context of the budget. So for the moment this is what we know and what impact this will have on mortgage rates and lending in general.
First question is always – will mortgages get cheaper? The answer – not in the short term. Lenders buy in funds on mass so that they are not at the whim of financial market. This process is called ‘tranching’. The tranches of funds last anywhere between 4-12 weeks, so we do not expect to see rates reduce for a few weeks yet.
If you follow our weekly updates, you will see that money markets have been on a downward trend for the last few weeks, which means we do not expect to see many meaningful change to mortgage rates for a few weeks yet. The best analogy I can give is that just as you see oil prices fall, your petrol doesn’t get cheaper straight away. It takes time for those costs to filter through the supply chain. This is exactly the same with mortgages.
I have a tracker or variable rate mortgage, so surely my rate goes down? Not necessarily. Lenders got cute to a very low interest rate environment in 2008, so many have introduced ‘collars’ to their rates, meaning that even if the Base Rate goes down, your headline rate may be capped at a higher level. This will be specific to the lender and product, so please call us if you want to talk through what this means for you.
On new lending, this works the same way, so if you think jumping onto a tracker rate will save you money, you may be disappointed. Again, this is lender specific, so again, please talk to us and we will advise you accordingly. The best place to check will be the small
The Bank of England suggested that lenders offer payment holidays for anyone affected by loss of earnings from self isolation or other adverse affects of Corona Virus. So far, NatWest (and the RBS group more widely) are the only lender to openly introduce this policy. I expect most lenders will follow suit. This is also a standard feature of quite a few lenders in any case. So again, check your mortgage offer document for details or speak to us and we will talk you through this
Will lending get easier or harder?
Neither. This response from the Bank of England is really designed to calm the stock market and give confidence for banks to lend to small businesses that may be affected by the knock on impacts of COVID-19.
Banks are far better capitalised than they were pre-2008, meaning, they have plenty of cash on reserve to get them through any lean periods like this. The Bank of England has also relaxed some of these rules in the short term. Meaning even more cash will become available.
Small businesses care about 3 things – Cash, Cash & Cash – so the base rate cut is aimed at helping businesses rather than consumers. We don’t expect any changes to mortgage lending, good or bad.
What can we expect with rates going forward?
The noises coming out of central banks (that includes in the Fed and ECB) are that the idea is to move quickly now, but then look to raise rates back later in the year once things settle down. So this does present a window to get some extremely attractive lending terms and hedge against potential rate increases later in the year. It is simply too early to tell if that will happen, but if all goes to plan, that is the expectation currently.
2 Year Variable from 1.24%
2 Year Fixed Rates from 1.14%
5 Year Fixed Rates from 1.41%
BTL Rates from 1.19%
The actual rate you will be offered will be dependent on your personal circumstance and deposit level. Please speak to one of our advisers so that they can guide you through this process.
Source: Twenty7Tec Feb 2020
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