First interest rate cut in four years brings boost to homeowners

The Bank of England voted to cut the cost of borrowing for the first time in four years earlier this month, reducing the base rate from 5.25% to 5%.

It was also a full year since the Bank rate last rose to 5.25% and the cut brought a huge sigh of relief for both consumers and businesses.

Financial markets had been split 60:40 as to the direction of travel with most suggesting that the only reason for a hold would have been the need to reverse any cut should inflation return in the Autumn.

The decision also came less than 24 hours after the United States’ Federal Reserve hinted at a possible rate cut in September after it maintained its benchmark interest rate in the 5.25%-5.50% range.

In the end the Bank of England’s rate setting committee voted narrowly for a cut by five votes to four.

Alpesh Paleja, Interim Deputy Chief Economist at the Confederation of British Industry, says: “The decision to cut interest rates was on a knife-edge, as illustrated by the narrow majority of the Monetary Policy Committee voting in favour.

“At best, there is only mixed evidence that inflation persistence has been defeated. While the labour market is loosening and wage growth slowly easing, the unexpected strength in services inflation remains a red flag.”

And Carsten Jung, Senior Economist at the Institute for Public Policy Research, says: “The Bank of England was right to cut interest rates but it has waited too long to do so. The Bank has been holding back the UK’s economic recovery by underappreciating the long-term effect of high interest rates..

“With inflation expectations back at pre-pandemic levels, and the labour market cooling, now is the time for the Bank to signal clearly that it will continue the lowering interest rates in the coming months.”

So will the Bank’s decision to cut rates mark the start of a rate cutting cycle?

Economists are still uncertain. Indeed, it seems likely that the Bank’s MPC members will be looking for more definitive signs of inflation continuing to ease. 

As Jill Mackay, savings specialist at Scottish Friendly, points out, despite rates having risen like a rocket, it is likely that rates will now fall like a feather.

“The cut is good news for households under mortgage pressure but will be bad news for savers who will begin to see their interest earnings slashed,” she says.

“With the economy growing better than expected, wages rising and employment still relatively robust, the bank will be keen to take a softly-softly approach in order to not reignite inflation. Where its neutral rate lies is an open question, but it will take time to arrive at.”

Mortgages

Some mortgage lenders, such as Coventry Building Society, the UK’s eighth largest lender, reacted to the Bank’s decision immediately, announcing an interest rate decrease of 0.25% on all variable mortgage rates. The reduction in rates will benefit all Standard Variable Rate (SVR) borrowers and all tracker rates will decrease in line with the Bank of England Base Rate on 1 September 2024.

According to market analysis from Moneyfacts in August 2023 both the average 2 and 5-year fixed rates were above 6%, at 6.85% and 6.37%, respectively. Since the start of February 2024, the average 2-year fixed rate has risen from 5.56% to 5.77% and the average 5-year fixed rate has risen from 5.18% to 5.38%.

These average rates have, however, fallen from 5.95% and 5.53% respectively since last month.

On a 10-year fixed rate mortgage, the average rate has risen from 5.87% to 5.93% since February 2024. The rate has fallen from 6.01% since the start of July 2024. The rate was 5.89% in August 2023.

Meanwhile the average standard variable rate (SVR) stands at 8.16%, down from 8.17% in February 2024. The rate has fallen from 8.17% since the start of July 2024. The average SVR has now been above 8% for almost a year. The rate was 7.85% in August 2023.

Rachel Springall, Finance Expert at Moneyfactscompare.co.uk, says: “Fixed mortgage rates have been falling at a steady pace, with lenders feeling more encouraged to re-price their deals due to lower swap rates. Consequently, the average rates on a two- and five-year fixed rate mortgage have both decreased month-on month for the first time in six months.”

But she cautions: “Waiting six months for rates to fall will no doubt require a lot of patience from borrowers who are counting down the days towards the end of their low-rate fixed deal.

“However, despite the latest falls, borrowers may want to see a bigger injection of rate competition, particularly as rates are higher than they were six months ago. Those desperate to secure a new deal for peace of mind could do so a few months before they come off their existing deal, as some lenders will let borrowers do this from three to six months in advance.”

And she says: “Borrowers coming off a deal this year must acknowledge that they will need to set aside more of their income to cover higher repayments.”

On average, a 2-year fixed deal was priced in at 3.95% in August 2022, and back in August 2019 a 5-year fixed was 2.84%.

However, it is still cheaper to lock into a fixed mortgage than sit on a revert rate. The Standard Variable Rate (SVR) has sat above 8% for almost an entire year and has almost doubled since the Bank of England started increasing base rate back in December 2021.

A typical mortgage being charged the current average SVR of 8.16% would be paying £380 more per month, compared to a typical 2-year fixed rate.

Springall adds: “First-time buyers trying to get their foot onto the property ladder will find some competitive deals out there, but their home-ownership dreams weigh on whether they can find an affordable property, particularly if they don’t have the Bank of Mum and Dad to make their dream a reality.”