What does interest rate cut mean for mortgages and savers?

The emergency 0.5% rate cut by the Bank of England in the midst of the coronavirus outbreak will mean monthly savings for householders with tracker mortgages but more pain for savers as interest paid shrivels again – and for most borrowers who have fixed-rate mortgages, there is no gain at all.

I’ve got a £200,000 fixed-rate mortgage. What does it mean for me?

Sorry, you get nothing. Nine out of 10 new mortgages are fixed rate (92.4% was the figure for the fourth quarter of 2019), normally for a term of two or five years, so, unfortunately, this rate cut does not get passed on. You will have to wait until you remortgage to find a better rate.

I have a £100,000 base-rate tracker mortgage. How much do I save?

Tracker mortgages, which promise to move in line with the Bank of England base rate, were popular before the financial crisis and lots of people are still paying them off.

Precisely how much you save will depend if your mortgage is interest-only – where you do not pay off the capital borrowed until the end of the term – or a repayment loan, where you pay off the capital borrowed every month.

If you have a £100,000 interest-only mortgage, the monthly cost will fall by about £42 a month. So if your current interest rate is 2% and it drops to 1.5% after this cut, then your monthly payments fall from £167 to £125.

For a £100,000 tracker mortgage on a repayment basis, the monthly cost will fall by about £24 a month. So if your current interest rate is 2% and it drops to 1.5% after this cut, then your monthly repayments fall from £424 to £400.

I have a buy-to-let mortgage. Will I get a cut?

Almost certainly. Nearly all buy-to-let mortgages are lent on an interest-only basis, as that is the most tax advantageous way for landlords to borrow. The rule of thumb is that a 0.5% cut in rate, equals a saving of about £40 a month for every £100,000 borrowed.

I’m about to take out a mortgage. Will I see better deals?

Yes. When interest rates were last at this level, some banks started offering two-year fixed-rate deals at below 1%. But you had to have a large deposit to qualify.

Currently the best two-year deals are from NatWest (1.19%) and Barclays (1.21%) but new deals are surely in the offing. Five-year deals are also expected to tumble.

Mark Harris, the chief executive of the mortgage broker SPF Private Clients, says: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% in 2017 (for a five-year fix from Atom bank). The big question is could they fall below 1%?”

Are my savings rates going to go negative?

Not yet – but watch out. The very best rate in the savings market right now is 2.15% – but you have to lock your money away for seven years. You can still find a rate of 1.7% on a one-year lock-in for your money at BLME bank. Ford Money has the highest easy access rate of 1.35% but that is only available to existing customers. You can expect a scramble to remove these rates and reprice downwards in the coming hours and days.

But that’s for people who scour the market for good rates. For most people with conventional accounts at the big banks, there really isn’t much more they can cut. Most banks already pay less than 0.5%. For example, HSBC’s popular Flexible Saver account pays either 0.1% or 0.15%.

So will the banks go negative? It has not happened in the UK but has been applied to some customers with large balances in Denmark and Switzerland. More likely, savings rates on mainstream accounts in the UK will just fall to zero.

What about my credit card?

You will save maybe a smidgen. Andrew Hagger of MoneyComms says: “If your credit card provider is one that links your rate to base rate you will see cheaper borrowing costs but the impact will be minimal – 0.5% less on a £2,000 credit card balance equates to just £10 savings in interest in a year – less than £1 a month.”

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