Coronavirus: What will the Bank of England’s interest rate cut mean for your mortgage?

Borrowers on tracker deals will see repayments reduced but many others may not experience much benefit

The Bank of England announced a surprise 0.5 per cent cut to its main interest rate on Wednesday, ahead of a Budget that is expected to contain further measures to help support the economy through the coronavirus outbreak.

But how will the rate cut affect your personal finances, particularly if you have a mortgage?

Mortgage rates

The short answer is that for millions of people the rate cut will not impact their mortgage payments as they are on fixed-rate deals.

If this is your position, you may find that when your current deal comes to an end there are cheaper options available, but until then it will have no impact on your mortgage.

People on tracker mortgages, which follow the Bank of England’s base rate (with some margin on top for your lender), will see their repayments fall. Only 11 per cent of outstanding mortgages are on tracker rates, however.

A further 16 per cent of mortgage borrowers who have been moved onto a standard variable rate (SVR) — often among the most expensive deals available — will also likely see a reduction in their repayments.

The Bank of England cannot force lenders to pass on rate cuts, and in the past some banks have been slow to do so.

But the part of the Bank that supervises large lenders, the Prudential Regulation Authority, explicitly warned lenders that they need to give the benefit of a rate cut to businesses and consumers — not use it to boost bonuses or shareholder dividends.

A reduction of 0.5 per cent will make a noticeable difference to monthly payments, though it will not be huge.

On a 25-year mortgage of £100,000, repayments will drop by £24 each month according to personal finance website Moneyfacts.

Some groups will not see a change, notably more than 200,000 borrowers classified as mortgage prisoners because they are unable to switch deals thanks to changes in affordability rules.

Many of these borrowers are with so-called inactive lenders, which collect payments but do not offer new mortgage deals. Their rates are significantly above the market rate.

Rachel Neale, who leads campaign group UK Mortgage Prisoners, said she will contact these inactive lenders, including Landmark, Heliodor, Mortgage Agency Service, and Tulip to request that they reduce rates in line with the Bank of England’s cut.

Mortgage repayment holidays

Perhaps more significant than the Bank’s rate cut for many people in the short-term, particularly those whose work has been impacted by the coronavirus, will be measures announced earlier this week by banks including Royal Bank of Scotland, Lloyds and TSB.

A number of lenders will offer temporary repayment holidays on loans and mortgages to help customers struggling because they have become ill or have self-isolated and are unable to work.

RBS is offering customers affected by the outbreak a three-month break in their loan and mortgage repayments.

TSB is offering a repayment holiday of up to two months and customers can apply for an emergency increase in their credit limits.

Barclays has not announced it is offering repayment holidays, but said customers in financial difficulty should speak to the bank’s specialist teams who may be able to grant early access to fixed savings accounts or increased credit limits.

Santander has advised customers to get in touch to discuss options if they are struggling financially because of the coronavirus.

Stephen Jones, head of UK Finance, said: “Banks, building societies and credit card providers understand that some of their customers may be worried about the effect that contracting the coronavirus (Covid-19) could have on their finances, for example due to a drop in income or because of unexpected expenses or bills to pay.

“All providers are ready and able to offer support to their customers who are impacted directly or indirectly by Covid-19, which could include offering or increasing an overdraft or allowing repayment relief for loan or mortgage repayments: asking for help early is key.

“We would encourage customers who think they may be affected to contact their provider as soon as possible to discuss the support available to them.”

Credit cards and savings

The suggestion that credit card providers will cut rates for borrowers has been met with deep scepticism, to put it mildly, and overdraft rates have already been ramped up in the last few months to an eye-watering average of almost 40 per cent.

Savers, especially those not comfortable with the prospect of increasing their exposure to risk in a bid to compensate are, unfortunately, in line for greater woes as already laughable savings rates slump further.