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Mortgages – a month on from base rate

Mortgages – a month on from base rate

Category: Mortgages

Updated: 01/09/2016
First Published: 01/09/2016

This article was correct at the time of publication. It is now over 6 months old so the content may be out of date.

We are now one month on from the Bank of England's decision to cut the base rate of interest. Given that there hasn't been a rate cut in many years, it was always going to be interesting to see how the mortgage market would respond, and our research shows that it's been a very mixed bag.

Surprise for variable rate customers

Perhaps surprisingly, the data shows that the initial reaction hasn't been as positive as may have been expected. Charlotte Nelson, finance expert at Moneyfacts, explained: "Borrowers would have assumed that a 0.25% cut in base rate would make them financially better off, particularly if they were on a variable rate. However, this is unfortunately not the case, with just under half of providers failing to pass this cut on to their Standard Variable Rate (SVR) customers."

Looking at the figures, we can see that the average SVR mortgage is down 0.09% month-on-month, from 4.80% at the start of August to 4.71% today. In comparison, the average two-year tracker mortgage has decreased by 0.19% from 2.13% to 1.94%, and the lifetime tracker rate has fallen by an average of 0.24%, from 2.98% to 2.74%. The average fixed rate mortgage, meanwhile, decreased by only 0.03% from 2.48% to 2.45%.

Given that fixed rates are at all-time lows, borrowers sitting on their SVR could still be better off opting for a fixed rate. For example, our calculations show that borrowers would be £243.03 a month better off (based on a £200,000 mortgage over a 25-year term on a capital and interest repayment basis) if they took out an average two-year fixed rate mortgage at 2.46%, rather than staying with an average SVR of 4.71%.

What about tracker mortgages?

Nonetheless, since most tracker mortgages track the Bank base rate, it does seem from the data above that they are indeed falling in line. But all may not be as it seems. "The average two-year tracker rate has been reduced by 0.19%," said Charlotte. "Yet shockingly, some providers, preempting the announcement, chose to increase their variable rate products, meaning the reductions have been offset. To illustrate this, at the start of July the average two-year variable tracker rate stood at 2.01%. This had increased by 0.12% on 1 August, therefore reducing the effect of the reduction in the month of August to 0.07% in real terms."

Charlotte added: "Given the bumpy road ahead for the economy, some providers are still quite cautious in their reaction to this new turn of events, with many choosing to wait and see to ensure they get the timing right." This may mean that mortgage customers could also be better off waiting for a bit to see if rates can go even lower, or alternatively a low fixed rate mortgage might be the safest way to go with all the uncertainty at the moment.

What next?

While the eventual path of mortgage rates remains uncertain, it's still a great time to compare the top mortgage rates and consider getting on the property ladder, or remortgaging to take advantage of record low rates

Disclaimer: Information is correct as of the date of publication (shown at the top of this article). Any products featured may be withdrawn by their provider or changed at any time.