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The likelihood of a cut in interest rates this week has been increased by similar moves by central banks around the world and growing fears of a recession. Some commentators have suggested the Bank of England could be more aggressive than usual and opt for a 1% reduction from its current level of 4.5%. But what would that mean for your mortgage?
0.25% cut to 4.25%
Assuming you are on a tracker deal, where the interest rate is always a set margin above or below the base rate, you will definitely see your payments fall. By how much depends on the size of your mortgage and what rate you are paying. According to the Council of Mortgage Lenders the average rate on a new mortgage taken out in August was 6.06%. Assuming this is cut to 5.81%:
• On an £80,000 repayment mortgage your monthly repayment would fall by £12.35 to £512, saving you £148 a year
• On a £130,000 repayment mortgage your monthly repayment would fall by £20.08 to £832, saving you £241 a year
• On a £250,000 repayment mortgage your monthly repayment would fall by £38.61 to £1,600, saving you £463 a year
If you are paying a higher interest rate you stand to save more.
If you have a mortgage linked to your lender's standard variable rate (SVR) you might not benefit from the full 0.25% cut, or any cut at all. If you have a fixed-rate mortgage you definitely will not see a cut.
0.5% cut to 4%
Again, you can only count on a cut of any size if you are on a deal tied to the Bank of England base rate. And, again, the amount you stand to save will depend on the size of your loan. Assuming your rate was 6.06% before the cut and you saw it reduced to 5.56%:
• On an £80,000 repayment mortgage your monthly repayment would fall by £24.58 to £500, saving you £295 a year
• On a £130,000 repayment mortgage your monthly repayment would fall by £39.94 to £812, saving you £479 a year
• On a £250,000 repayment mortgage your monthly repayment would fall by £76.81 to £1,562, saving you £922 a year
1% cut to 3.5%
Again, your deal must be tied to the Bank of England base rate if you are to see any change at all, and even then a 1% cut might not see your pay rate falling by the same amount. Most tracker deals have a collar - a minimum rate the lender is prepared to move you to. If your rate is tracking below the base rate you could be nearing that level. But assuming your rate was 6.06% before the cut and you saw it reduced to 5.06%:
• On a £80,000 repayment mortgage your monthly repayment would fall by £48.62 to £476, saving you £583 a year
• On a £130,000 repayment mortgage your monthly repayment would fall by £79.01 to £773, saving you £948 a year
• On a £250,000 repayment mortgage your monthly repayment would fall by £151.95 to £1,487, saving you £1,823 a year
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