Base rate cut: good news for mortgage


Anyone looking for a mortgage – or paying their existing mortgage – may have been surprised as well as pleased by the Bank of England's unexpected announcement on Wednesday 8th October. The 0.5% 'emergency' base rate cut they announced was in itself surprising, and so was the timing: ordinarily, it was not due until the following day, but the BoE ended up holding a special meeting 'in advance of its normal schedule'.
Given the ongoing financial crisis in mortgage markets and other credit markets, it is perhaps not too surprising that the BoE brought its meeting forward a bit.

It's interesting to note that this 0.5% drop is the largest change since November 2001, as all increases and decreases since then have been a mere 0.25%. Therefore, the sheer size of the cut is unusual – but it is nowhere near as unusual as the global nature of the move. The Bank of Canada, the European Central Bank, the US Federal Reserve, Sveriges Risk bank and the Swiss National Bank also announced 'reductions in policy interest rates'. As Prime Minister Gordon Brown put it: "global problems are best dealt with by global action".

Whatever the global implications, UK mortgage holders (and mortgage seekers) will be more concerned about what the base rate cut means for their mortgage payments. Encouragingly, a range of mortgage providers moved quickly to announce drops in the cost of their mortgages. According to the BBC, Woolwich intends to cut its standard variable rate (SVR), and both Halifax and Lloyds TSB plan to reduce their SVR from 7% to 6.5% on 1 November.

Anyone with a tracker mortgage (a type of mortgage, which follows the base rate's difficulties) will automatically see their monthly mortgage payments drop.
Moreover, although existing fixed-rate mortgages will not change, the cut will make it easier for mortgage providers to cut the cost of any new fixed-rate mortgages they offer.
Homeowners coming to the end of their mortgage term, of course, will be wondering whether to move to their lender's SVR or look around for a remortgage (with a different mortgage provider, perhaps). Whichever path they choose, there is a good chance they will benefit from this base rate cut.

Even so, it is important to realize that this drop is no 'silver bullet' for the problems in the mortgage market. As David Black (Defaqto's Principal Consultant – Banking) pointed out: "The average five-year base rate tracker mortgage is now 1.07% higher relative to the bank base rate than it was back in July 2006," referring to the last time the base rate stood at 4.5%.

In summary: anyone looking for a mortgage or remortgage should seek mortgage advice immediately. In today's turbulent times, there is no way of knowing what will change next, how quickly it will happen, and whether it will help or hinder mortgage holders. The right mortgage advice, however, can help people make some sense of today's economy. It can help them understand what is likely (and what is not) to happen next in mortgage markets, and make an informed decision about their mortgage based on that.




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