Interest Rates were cut at 7 am this morning as the Bank of England made the extraordinary decision to slash the Bank of England Base Rate by 0.5%, back to their historic low of 0.25%.
For a central bank to cut interest rates on the morning of a Budget is an extraordinary move that reflects the gravity of the Covid-19 situation unfolding.
Over the past 48 hours, a growing number of lenders have come out and said they will support homeowners with payment holidays due to the coronavirus threat, but this takes things to a whole new level.
Whilst savers are again feeling the squeeze, borrowers on a tracker rate will see an immediate benefit in their next month’s payments. Borrowers on a fixed rate will see no immediate change to your monthly payments.
For those who have not taken out a mortgage yet, it will be interesting to see what lenders do here.
Whilst Tracker rate products suddenly look much more attractive, it is likely lenders will reprice these at a slightly higher level. So rather than Bank Base + 0.74% = 1.49%, you may now get Bank Base plus 1.20% = 1.45%.
Fixed-rate changes are more complex, and whilst SWAP rates have reduced dramatically and will reduce further on this news, we may not see wholesale fixed rate cuts.
On a commercial level, this emergency rate cut by the Bank of England will put even more pressure on lenders that are already struggling with slim margins and they may choose to use this to help bolster reserves to support themselves and potentially customers affected by the Coronavirus (i.e. loss of income, employment, etc.) during the crisis.
Conversely, some lenders could even increase rates slightly as they could price in the fact that their own staff levels may be low in the weeks and months ahead and they may not be able to cope with any increased demand.
As always, I suspect there will be a few lower headline rates announced by some lenders, but this will be more about getting attention and market-share in short bursts rather than a sustained approach.
In summary, I think any reductions are likely to be very modest, but we are likely to know for sure over the next few days as lenders react to the interest rate cut. Lenders will be in a tailspin as they seek to get their heads around this drastic move from the Bank of England and it’s important to remember that the action taken is temporary and rates may well go back up as soon as the virus threat abates.
With this in mind, it does seem like an extraordinary time to lock into low rates if you have a remortgage coming up for renewal any time soon. This is similar for buyers as well and despite the headlines, many canny buyers know an opportunity when they see one.
We are living in truly unprecedented times, but as ever our professional advisers are here to help you every step of the way. Contact us here.