What will the Base Rate cut mean for my mortgage?

Last Thursday’s shock 1.5% base rate cut was the most dramatic since 1981, when the UK was in the midst of a full recession.

This follows a 0.5% cut last month and means that UK interest rates are now at 3% - their lowest level since 1955.

The question for borrowers now is how will this affect their finances and in particular their mortgage.

Rate Change Calculator - See how a rate change will affect your monthly payments

Borrowers who have sought the security of a fixed rate mortgage will see no change to their rates until their fixed rate period ends.  Those with tracker mortgages will see their rates drop automatically – typically from 1st December, but people whose mortgage rates are linked to their lender’s Standard Variable Rate (SVR) will have to wait and see.

The good news for this latter group is that many of the UK’s major mortgage lenders have been swift in passing the full 1.5% rate cut on to their borrowers.  Lloyds TSB was the first lender to announce a 1.5% cut to its SVR shortly after the Bank of England’s announcement

Other major lenders such as Abbey, Nationwide, Halifax and Royal Bank of Scotland followed suit with the full cut, as did the now state-owned Northern Rock.

Whether or not these movements were due to pressure put on lenders by the Government to pass on the cut to customers, it is good to see them making the cuts and making them quickly.

Many other lenders are yet to announce a change in their SVR and there are still a number of them who are yet to move their base rate following last month’s 0.5% cut – they will be watched very carefully over the next few weeks.

See our SVR table

The other major question is what effect will this rate cut have on new mortgage rates.  Unfortunately, it doesn’t always follow that a 1.5% cut in the Base Rate will mean a similar drop in mortgage rates.

The rates that lenders offer on many mortgages are influenced by LIBOR (London Inter Bank Offered Rate) – the rate at which banks lend money to each other.  Traditionally, this follows Base Rate fairly closely, but it has been a lot higher in recent months due to the credit crunch and the perceived risk of lending money to other institutions in the current climate.  LIBOR fell following the cut to the Base Rate, but by a lot less.

So whilst Base Rate has fallen, it is likely that lenders will respond by offering tracker mortgage deals at a higher margin over this rate – as they did after last month’s cut.  In fact, shortly after the Bank of England’s announcement, mortgage lenders started withdrawing their tracker rates until there were virtually none left on the market.  Many are yet to be replaced.

The Base Rate cut has also caused swap rates to fall considerably, so expect to see lenders launching some new, cheaper fixed rate mortgage deals in the near future.

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