What does the interest rate cut mean for movers and homeowners?

The Monetary Policy Committee of the Bank of England finally relented this month, and dropped interest rates by 0.25% to 5%. The split vote of 5 to 4 in favour of the cut was the first time rates have been cut since March 2020, when the economic impact of COVID-19 was frantically being counteracted by the Bank of England.

There have been many UK professionals who have been pondering when to move, or when to refinance their home based on renewed optimism - but is this optimism ill-founded and a bit premature? The rate cut was received warmly from much of the mortgage industry, with many positive words about the direction and pace of further rate cuts. However, the Governor of the Bank of England warned that rapid cuts by larger than 0.25% were not on the agenda.

Many High Street lenders had anticipated the rate cut in the days leading up to the decision and had made small reductions, especially with 5-year fixed rates. Nationwide Building Society grabbed the headlines with their eye-catching sub-4% rate. NatWest, Barclays and Halifax were close behind at a touch over 4% for a similar 5-year fixed term. It should be said that these eye-catching rates all demand a deposit or equity at 40% of the property value – not an easy thing to achieve for most!

A more realistic deposit or equity figure would result in a 5-year fixed rate of 4.45%, still very competitive given the base rate at 5%. A £300,000 loan over a 30-year repayment mortgage would set you back £1,518 per month. Given the average rent in London is over £2,000 and climbing, mortgages are presenting decent value again versus long term renting. It should be pointed out that a loan of £300,000 means a purchase price of £353,000 if you are putting down 15%, which only gets you a 1-bedroom flat in London if you’re lucky!

For those looking at their pending fixed rate expiry date, there is also positive news. With an equity figure of 25% or more, there is still a monthly mortgage payment of just over £1,500 per month at a rate of 4.37%. This does mean extending the mortgage term to 30 years though, a prospect that will frustrate many homeowners who have been paying down the loans for a number of years.

With the UK’s policy-makers and rate-setters urging caution and keeping their foot on ther brake around rate reductions, the positive news is that lenders looked at where the rates could go and started pricing in reductions early on. If lenders are now more confident that the direction of travel is down, albeit on a gentle slope, they may be more inclined to launch headline-grabbing rates like Nationwide.

A 5-year fixed rate at 3.5% is the next threshold, and it could be seen in a matter of months. This would mean a £300,000 loan would drop by around £87 per month if taken over 30 years. The great prospect when considering this is what rents are doing in many parts of the country. If you are a renter, the time to seek advice about mortgage borrowing capability may be a prudent call to make ahead of time.

Remortgagors are likely to feel some pain if they secured good rates several years ago, but the pain will be less than where we were in July. Early planning and impartial advice will again be crucial in ensuring a new mortgage package is affordable.