What the Bank of England’s emergency base rate cut to 0.25% means for borrowers

What the Bank of England’s emergency base rate cut to 0.25% means for borrowers

• The Bank of England announced an emergency cut of 0.5 percentage points

• This is the biggest cut since the financial crisis in 2008

• The bank rate is one thing that affects how much banks pay savers and charge borrowers

The Bank of England has slashed its base rate by half a percentage point to 0.25 per cent, the steepest rate cut since the 2008 financial crisis. It said the emergency cut, the first reduction since August 2016, was to counter the ‘economic shock’ of the coronavirus outbreak. After two years at 0.75 per cent, it means the rate is back to an historic low.

The Bank of England announced yesterday it would cut its base rate to 0.25% from 0.75% The Bank’s base rate – officially called the bank rate – determines what it pays to Britain’s banks when they hold money with it. In turn, this can affect how much those banks pay savers or charge borrowers, be they taking out credit cards, personal loans or mortgages.

If the bank rate changes, banks usually adjust their own interest rates, though with many savings and mortgage rates at all-time lows there is less room for manoeuvre.

So are mortgages going to get even cheaper?

Andrew Montlake, director of mortgage broker Coreco, said: ‘For a central bank to cut rates on the morning of a Budget is an extraordinary move that reflects the gravity of the Covid-19 situation unfolding.’

The move follows announcements from banks including NatWest, Lloyds and Royal Bank of Scotland that they would offer repayment holidays for mortgage customers affected by coronavirus. Montlake added: ‘This takes things to a whole new level. Borrowers on a tracker rate will see an immediate benefit but savers will inevitably feel the squeeze.’

Lloyds Banking Group announced those on mortgages which track the bank rate or are on a reversionary rate will see a reduction of 0.5 per cent by 1 April.

‘Strangely this does not necessarily mean rates will come down as lenders will be pricing 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 the increased demand’, Montlake said.

The Bank of England’s drastic rate cut marks the first time since 2016 that rates have been cut, and the first emergency cut since the 2008 financial crisis ‘Lenders will be in a tailspin as they seek to get their heads around this drastic move from the Bank of England. We are living in truly unprecedented times’.

‘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.’ Mortgage rates are currently at near-historic lows, especially on deals where homeowners lock themselves in for 10 years.

Those currently on fixed-rate mortgages will obviously not see an effect until they come to remortgage, but when they do the rates they are paying could fall, if the base rate is not adjusted again before then.

Mark Harris, chief executive of mortgage broker SPF Private Clients, said: ‘This is a bold and decisive move from the Bank of England. ‘Swap rates – which banks use to price mortgages – 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 per cent in 2017. ‘The big question is could they fall below 1 per cent?’

However, Laura Suter, personal finance analyst at investment platform AJ Bell, said: ‘Mortgage rates are already near record lows and it’s unlikely providers will be able to cut them much more – let alone pass on the entire rate cut. ‘The exception is those on tracker rates, who will see a near-immediate effect on their monthly repayments.’

By GEORGE NIXON FOR THISISMONEY.CO.UK
PUBLISHED: 07:32, 11 March 2020 | UPDATED: 17:39, 11 March 2020