Bank Base Rate Cut: What does it mean for house buyers?
On Thursday, 1 August 2024, the Bank of England cut its Base Rate to 5%, the first rate cut in four years. The mortgage market heaved a huge sigh of relief as the Bank signalled the reduction. It is also good news for homeowners and house buyers as mortgage lenders set their mortgage rates with one eye to the Bank of England base rate.
Why did the rate remain so high for so long?
The Bank of England is charged with managing the inflation rate. One of the key tools at its disposal is the bank’s base rate. The target rate of inflation the Bank of England seeks to keep below is 2%. However, when it considers inflation is on the rise, it usually increases interest rates to dampen demand in the economy. It is something of a blunt instrument because it impacts on business as well as consumers.
As inflation began to rise, the Bank of England imposed incremental rate increases from historic lows until it peaked at 5.25% in August 2023. Inflation peaked at over 11% in October 2022 and slowly dropped until it recently came down to the Bank of England target of 2%. The indication is that if inflation remains at or below 2%, Bank of England base rate will gradually fall with, perhaps, another cut before the end of 2024.
Mortgage rates and Bank of England Base Rate
All mortgage lenders set their mortgage rates with an eye to the Bank of England base rate. Mortgage lenders also consider the inflation picture and economic stability when making mortgage rate decisions. This clearly impacts on homeowners and home movers.
In anticipation of the base rate reduction, some mortgage lenders have already offered more competitive fixed-rate mortgage products. Market competition is likely to see more mortgage lenders lower their fixed rate deals.
Downward trend is good news for home buyers
The downward trend in inflation and the Bank of England base rate is good news for homeowners and home buyers because it means the cost of borrowing is cheaper.
For those applying for a mortgage, the reduced rates mean the affordability scoring is a little less challenging. It also means monthly mortgage payments will be less than we are currently seeing.
Light at the end of the tunnel for those on high-rate fixed term mortgages
For those approaching the end of a fixed term mortgage, it means not only will the standard variable rate be lower, but the potential of securing another competitive fixed-rate deal is better.
We are unlikely to see the ultra-low mortgage rates enjoyed for many years when Bank of England base rate was at a record low. However, lower base rates will feed through to the mortgage market with the ultimate result of reduced monthly mortgage costs.
It is essential to seek professional advice
Paris Steele is not authorised to give financial or mortgage advice. However, we can refer you to a mortgage adviser who will be able to guide you through the available mortgage options. If you would like us to refer you to an adviser to discover what is available to you, please get in touch with us today.