November 22, 2024
What does an interest rate cut mean for mortgages? #UKFinance

What does an interest rate cut mean for mortgages? #UKFinance

CashNews.co

The mortgage lending market watched as the Bank of England (BoE) reduced interest rates to 4.75% on Thursday, with Threadneedle Street’s Monetary Policy Committee (MPC) voting by a majority of 8–1 to reduce interest rates by 0.25 percentage points.

This rate is used by the central bank to charge other banks and lenders when they borrow money, so the move may impact mortgage and savings rates.

Following the long-anticipated move, the BoE said it is appropriate to take a “gradual approach to removing policy restraint” — ie, cutting interest rates.

The minutes of this week’s meeting said: “Monetary policy will need to continue to remain restrictive for sufficiently long until the risks to inflation returning sustainably to the 2% target in the medium term have dissipated further.”

The fact that today’s rate cut came as no surprise to the market has meant a lack of noticeable immediate movement in mortgage rates by banks.

“We’ve already seen a material drop in fixed rate mortgage costs this year, with the typical rate falling from 5% to 4.4%, according to Bank of England data (based on a 75% loan to value),” said Laith Khalaf head of investment analysis at AJ Bell.

READ MORE: Interest rates must not be cut too quickly, says Bank of England chief

Meanwhile, the typical one-year savings bond has fallen back from 4.9% to 4.1% this year.

“Fixed rates are more dependent on longer-term rate expectations, especially when a move has been priced in like this one,” said Khalaf. “Variable rates on savings and mortgages on the other hand should fall back as a result of this latest interest rate cut.”

Some banks preemptively pulled fixed-rates in anticipation of the move, including Coventry, Skipton and Santander.

“This pre-emptive move was driven by expectations of market volatility and potential shifts in global financial conditions,” said Holly Tomlinson, financial planner at Quilter.

“Now that the rate cut has been implemented, lenders are likely to reintroduce fixed-rate products, potentially at more competitive rates.”

Despite the rate reduction, the base rate is still near historic highs, spelling prolonged pressure for borrowers. What’s more investors are paring bets on future cuts, too following the budget and the election of Donald Trump.

“Sterling has received a modest boost as investors dial back their bets for UK cuts, with just two further 25 basis point rate reductions priced in for the next twelve months,” said Matthew Ryan, head of market strategy at Ebury.

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