On 4 August 2016, the Bank of England cut the base rate to 0.25%, a decision that has had a huge impact on mortgages and savings rates. As we approach a full year since the drop, moneyfacts.co.uk has analysed how the cut has impacted the interest rates on offer to consumers.
As the table below shows, both sectors have seen their rates drop considerably, with record lows being hit on a near-monthly basis – only recently has the fixed rate bond sector been showing some signs of life – but while this is great news for mortgage holders, savers aren't quite so lucky.
|Average Mortgage Rates||Aug-12||Aug-15||04-Aug-16||Today|
|2-year fixed mortgage||4.62%||2.68%||2.47%||2.24%|
|5-year fixed mortgage||4.73%||3.24%||3.08%||2.80%|
|Standard variable rate (SVR)||4.84%||4.84%||4.80%||4.60%|
|Average Savings Rates||Aug-12||Aug-15||04-Aug-16||Today|
|2-year fixed bond||3.29%||1.78%||1.29%||1.32%|
|5-year fixed bond||3.79%||2.62%||1.96%||1.92%|
|Easy access account||1.03%||0.65%||0.55%||0.39%|
|Source: Moneyfacts.co.uk||Compiled 01/08/2017|
"It's clear to see that the decision by the Bank of England to cut bank base rate to a record low of 0.25% has had a positive impact for mortgage borrowers, but like a double-edged sword, the cut hit an already suffering savings market," said Rachel Springall, finance expert at moneyfacts.co.uk.
"Mortgage rates have fallen to record lows, so borrowers who decide to switch to a more competitive rate will notice the benefit immediately by their lower monthly repayments. Those who come off an average SVR of 4.60% today and switch to the average five-year fixed mortgage rate of 2.78% would save £148.02 a month on their repayments, which is £8,880.81 over a five-year period (based on a £150,000 mortgage over 25 years on a repayment basis) – cash that could be put to far better use considering the rising cost of living."
However, it's important to point out that, while these low rates are inviting, not everyone will be eligible to change their deal – especially if they are 'just about managing' – largely thanks to strict affordability rules. "Regardless of whether they can demonstrate that their monthly repayments would fall, if they are unable to prove that they could afford a future rise to their interest rate, then they could end up as another mortgage prisoner," said Rachel.
"Savers on the other hand have very little to celebrate, as the base rate cut just gave providers another excuse to slash rates – in August last year, we had just three rate rises for the entire month, compared with 388 cuts."
The losses could be marked, too. Our calculations show that a saver who had £10,000 earning 3.79% in a five-year fixed bond back in August 2012 will now be faced with an average bond that pays just 1.67%, which equates to a £1,180.83 loss in return over the same period (when interest is compounded annually).
"It still remains that, due to Government lending initiatives, several providers have no desire for savers' deposits to fund their mortgage books – which is why there is a large discrepancy between the rates on offer from these institutions compared with challenger banks," said Rachel.
"Challengers have almost singlehandedly propped up the savings Best Buys with their deals because it can be essential for their future to attract savers' cash and build trust for the brand. However, despite their positive injection, the market is unlikely to bounce back as a whole for quite some years yet, even if base rate were to slightly rise.
"With all this in mind, anyone who has yet to switch their mortgage would be wise to seek advice, and any savers looking to maximise their interest would do well to consider the less familiar brands."
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