The economy's base rate is historically low - but what does that mean for your mortgage and savings?
by Derin Clark
Last month, as it became clearer that the coronavirus pandemic would have a massive impact on the UK economy, the Bank of England made two base rate cuts. While cutting base rate was done to help the economy at a national level, the cuts also have an impact on finances at a personal level.
With just a month on from the base rate cuts, we take a look at how they have impacted savings and mortgage rates.
What do the base rate changes mean for me?
Base rate is now at a historic low of 0.10%. This means that it has never been cheaper for banks and building societies to borrow money, which, as a result, should also make it cheaper for consumers to borrow money. Normally, the largest sum a consumer will borrow from a bank or building society is through a mortgage and, usually, a low base rate means low mortgage rates.
Data provided by Moneyfacts.co.uk shows that this is indeed the case. On Monday 9 March 2020 (which was two days before the first base rate cut from 0.75% to 0.25% was made) the average two year fixed rate mortgage deal on a 85% loan-to-value (LTV) was 2.49%, while the average two year rate on a 65% LTV was 1.98%.
A week later, on Thursday 19 March, base rate was again cut to 0.10%. The data shows that after the second base rate cut, average rates on two year fixed mortgage deals at 85% LTV had already fallen, dropping to 2.43% on Monday 23 March. Meanwhile, the base rate cut had not affected the average two year fixed rate at 65% LTV and it continued to stand at 1.98%.
Just two weeks later, however, the average two year fixed rate deal on a 65% LTV had fallen, standing at 1.73% on Monday 6 April. At the same time, the average 85% LTV two year fixed rate had continued to drop, standing at 2.34% on the 6 April.
A similar pattern can be seen with longer-term fixed rate mortgages. For example, the average rate on a five-year fixed mortgage at 85% LTV was 2.81% on Monday 9 March, and 2.24% on the same term up to 65% LTV.
Two weeks later, on Monday 23 March, the average five-year fixed deal on an 85% LTV had fallen to 2.74% while the average five year fixed deal on a 65% LTV had fallen to 2.18%. Another two weeks later and average five year fixed rates had fallen again to 2.62% on an 85% LTV and 1.85% on a 65% LTV on Monday 6 April.
Should I remortgage now?
For mortgage borrowers, the cut in base rate has resulted in mortgage rates falling, which means now is a good time for homeowners to consider remortgaging. This is particularly true for homeowners on a lender’s standard variable rate (SVR), as they could find they might make significant savings on repayments by switching to a new mortgage deal.
Saying this, unfortunately for first-time buyers or others looking to get a mortgage on a 95% LTV, many banks and building societies have been pulling high LTV products from the market. It is believed that this is only a temporary withdrawal to enable banks and building societies to cope with the demand the coronavirus pandemic has had on the mortgage market.
However, it has resulted in a rise in average two year fixed rates on 95% LTVs, from 3.25% on Monday 9 March to 3.36% on Monday 6 April. As a result, first-time buyers or those looking to borrow at a high LTV should consider waiting until more high LTV products are available in the market again.
Research the market
While the base rate cut has been good for mortgage borrowers it has not been welcomed by savers. Saving rates, which were already low before the base rate cuts, normally fall with base rate, especially rates on easy access accounts.
Before the first base rate cut, the average easy access account rate stood at 0.57% on Monday 9 March, and the average easy access ISA stood at 0.84%. Just a few days after the first base rate cut, easy access rates had already fallen, with the average easy access savings rate standing at 0.56% and the average easy access ISA at 0.83% on Monday 16 March.
The second base rate cut impacted easy access rates further and the average easy access savings rate fell to 0.54% and the average easy access ISA to 0.81% on 23 March, falling again to 0.50% and 0.76% respectively on Monday 6 April.
For savers, this means that the base rate cuts have contributed to falling savings rates and, in turn, savers looking to get a good deal need to research the market and maybe opt for a less familiar bank. For example, challenger banks often offer savers higher rates than well-known high street banks and should be considered by savers looking to get the best savings rates.
A full list of the mortgage deals and savings accounts available today can be found on Moneyfacts.co.uk