Bank of England holds base rate again: what does this mean for my mortgage?
After months of consecutive cuts to the base rate, it finally seems that the Bank of England’s Monetary Policy Committee (MPC) has thrown away its scissors. For the second month in a row, it has decided to hold the base rate at its historic low of 0.5%.
The move was widely anticipated by experts, as the Bank’s quantitative easing strategy is now well underway. It seems this policy – which involves ‘creating’ new money in order to stimulate lending and spending – is now at the centre of its plans for combating the recession.
Growing confidence that the Bank of England base rate has now bottomed out could have a significant impact on British mortgage borrowers – especially those looking to remortgage in the near future.
So if you’re thinking of buying a home or remortgaging sometime soon, what do you need to consider?
Stopped in their tracks?
First of all, it is my view that tracker mortgages should now be approached with caution. This is because now the Bank of England base rate appears to have reached its lowest ebb, there is only one way for the payrates on trackers to go: up.
While the rates on offer from many trackers currently look attractive, it’s important to note that most of these mortgages track around 2% - 3% above the Bank of England base rate. This means a rate which looks affordable now could rapidly become expensive when base rate begins to rise again.
If you’re interested in opting for a tracker mortgage, it’s worth looking around for a deal that will not tie you in with early repayment charges (ERCs). In this case, you would be able to ditch your tracker and lock in to a new fixed rate mortgage deal as soon as you felt this might offer better value. (For a longer discussion of the benefits of trackers versus fixed rate mortgages, read this article.)
Clever caps
Alternatively, you could hunt out a capped mortgage deal. These products offer the combined benefits of a variable rate and the assurance that the monthly payments on your mortgage will not climb above (or fall below) a certain level.
Last week, Yorkshire Building Society launched a new two-year tracker mortgage at an interest rate of 3.19% (Bank of England base rate + 2.69%), with a cap of 5.49%. This mortgage also comes with a collar of 3%, which means the payrate on this deal will never fall below this level – even if the Bank of England defies expectations and reduces the base rate further.
It is available to mortgage borrowers with a 25% deposit, and comes with a competitive product fee of £245.
Elsewhere, Coventry Building Society and Woolwich are offering tracker mortgages with caps and collars.
It is worth noting, though, that most of the capped mortgages on the market require borrowers to have deposits of at least 30%. In addition, mortgages with caps tend to be more expensive than those without.
Super secure
Fixed rate mortgages have long held a strong appeal among British borrowers. The reason for this is simple: they allow you to commit to a mortgage rate that you know you can afford, for an agreed period of time.
Fixed rate mortgages are often popular with first time buyers, as they make budgeting for your monthly housing costs more straightforward.
While choosing a fix means your mortgage payrate cannot increase, the downside of opting for a fixed rate deal is that, in an era of falling interest rates, you will not see any reduction in your monthly mortgage repayments.
However, I believe this risk is now minimal. In my opinion, if the Bank of England base rate changes it is more likely to go up than down – and this means going for an affordable fixed rate deal now could be a smart move.
What’s more, some mortgage experts predict fixed rate mortgages may soon become more costly. This is because they are increasingly popular among borrowers, and because the yields on government gilts rose in March. Gilt yields affect the cost of borrowing in wholesale money markets, and this may have a knock-on effect on the cost of borrowing to consumers.
Therefore, if you’re thinking of going for a fixed rate mortgage, it may be worth doing so sooner rather than later.
You may also want to consider a medium term fix (for example, five years) or a long term fix (10 years or more), depending on your personal circumstances. While these deals are by no means the cheapest on the market, many of them still offer historically competitive rates.
In addition, committing to stick with the same mortgage for longer will mean you avoid hefty remortgaging fees every few years – which, over the course of a decade for example, could seriously add up.
Of course, if you go for a long term fix it is vital to find out what penalties are in place on the deal in case you need remortgage before the fixed term expires. It is also important to confirm that the mortgage is portable, in case you choose to move house during the term.
It’s all about you
As always it is crucial to remember that, when it comes to mortgages, one size decidedly does not fit all.
Mortgages are complex financial products, and – as you can see from this article! – there are now many different options currently available to borrowers.
If you’re about to purchase a new home or remortgage your existing one, it’s a good idea to seek advice from a mortgage broker before you take the plunge.
If you ensure the choice you make is the right one for you, you should still be smiling at the end of your mortgage deal – no matter what happens to the Bank of England base rate over the next 12 months.
**This material is for information purposes only and should not be considered financial advice. We strongly encourage our readers not to rely solely on this content, but to seek independent advice when making financial decisions.**
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