Those with large tracker mortgages can prepare to break out the prosecco. If you rely on savings income, it’s more brown ale for you – or even water.
Next week the Bank of England is expected to cut interest rates for the first time in seven years – and whether you welcome the expected 0.25% cut will largely depend on which of the camps you find yourself in. Two weeks ago City analysts worked themselves into a frenzy over a cut in rates that failed to materialise. The nine-member monetary policy committee decided it was too soon, post-Brexit, to make a decision, but next Thursday it meets again, and a rate cut is a certainty, according to most experts.
So what will it mean if a 0.25% cut get’s the green light?
Someone with a £150,000 Nationwide base rate tracker mortgage, currently at 2% over base (ie 2.5%), will have their repayments cut from £673 a month to £654. If the Bank of England slashed rates to zero, the mortgage cost drops to £636 a month. The impact is bigger if the borrower has an interest-only mortgage. The cost of servicing a £150,000 loan would drop from £313 a month to £281 at a base rate of 0.25%, or £250 if interest rates hit zero.
Those on fixed-rate deals will see no change, nor, probably, will those on a lender’s standard variable rate, which have mostly been closer to 4%.
For savers who thought things couldn’t get any worse, it could spell a further round of rate cuts – to the best buys at least. Currently, the best buy no-notice or short notice savings accounts are paying 1.61% (Charter bank, 95 days’ notice); 1.22% (Tesco, instant). The best paying cash Isa comes from the Al Rayan bank: 1.55%. They would all be likely to face pressure to cut these rates following a base rate chop.
Anna Bowes, who runs SavingsChampion.co.uk, says many savings accounts can’t actually accommodate a 0.25% cut because they are already paying rates below that level. She says since Funding for Lending was introduced in 2012 (under which the government gives the banks cheap loans) consumers have had nearly 4,700 cuts to existing savings accounts. “Savers really have been the sacrificial lambs of this downturn. While borrowers have benefited from historically low rates, savers have never known it so bad. However they must not lose hope as there are still providers that want savers’ cash and are willing to pay a competitive return for it,” she says.
