Rate cut ‘may help homeowners but a challenge for those about to retire’
Some mortgage holders will be given a boost by the Bank of England slashing interest rates from 0.75% to 0.25% in an emergency move, but savers and those approaching retirement face particular challenges, experts have said.
Homeowners on variable rate mortgages can expect to see the size of their monthly mortgage repayments reduce, if the deal they are on directly tracks the base rate.
For borrowers on a standard variable rate (SVR), it is their lender which sets the rate they pay, so homeowners will need to see if the lender passes the cut on to them.
Borrowers often end up on an SVR when an initial mortgage deal comes to an end.
The rate cut will not have an immediate impact on homeowners who are currently locked into a fixed-rate mortgage deal which lasts for a certain length of time.
But they may be able to find a cheaper deal when their current one comes to an end.
Martin Lewis, founder of MoneySavingExpert.com, said: “The financial winners are those on variable and tracker rate mortgages. They will see cost cuts of – very roughly – £25 per month per £100,000 of mortgage.
“And while it’ll take a week or two to factor through, it’s likely we’ll see the rate of new mortgage fixes drop too – meaning it will then be a very cheap time to re-mortgage.
“Most loans, credit cards and other debts will likely be unaffected or only minimally affected because the Bank’s interest rate only plays a small part in their rates.”
Lending giant Lloyds Banking Group confirmed that customers with a mortgage which tracks the bank rate or on a reversionary rate will see a reduction of 0.50% by April 1.
This means that SVR deals such as the Halifax standard variable rate will be cut by 0.50%.
Lloyds said it is reviewing its savings rates – but offering a glimmer of hope for savers, it said that changes to savings rates will not reduce by as much as the full reduction in the bank rate.
Rachel Springall, a finance expert at Moneyfacts.co.uk, said: “The mortgage market experienced a significant fixed-rate war in 2019.”
She said that with lenders’ profit margins already tight, it is unclear whether they will be able to chop rates on new deals much further.
Ms Springall said: “Those worried about volatility with interest rates in the months to come may wish to consider a five-year fixed mortgage for peace of mind, particularly as the average rate is at a record low.
“As it stands, there may well be borrowers sitting on their standard variable rate hoping this cut will get passed on to them soon, so that they can see a reduction to their monthly mortgage repayments.
“However, with the difference between the average two-year fixed mortgage rate and average SVR standing at 2.47%, it’s clear to see the potential benefits of switching.”
Andrew Hagger, founder of Moneycomms, said people with other types of debt may not see much difference to their finances.
The move comes at a time when many banks are increasing the cost of an arranged overdraft to around 40% as they look to comply with new industry rules coming into force in April.
He said: “If your credit card provider is one that links your rate to base rate, you will see cheaper borrowing costs but the impact will be minimal – 0.5% less on a £2,000 credit card balance equates to just £10 savings in interest in a year – less than a pound a month.
“It’s those with overdrafts that could do with some help – but with most banks charging around 40% interest, a 0.5% cut isn’t going to make any meaningful difference to people’s finances.”
For savers, the rate cut spells more misery.
According to Moneyfacts’ data, the average easy access Isa on the market now pays 0.84% based on someone having £10,000 to put away – compared with 0.94% at the start of 2019 and 1.77% in March 2009.
Ms Springall said: “This will be devastating news for savers who are already seeing returns plummet across the market.
“As we have seen in just the past 12 months, competition is stagnating, and it has become the norm to see providers cut rates to adjust their market position rather than launch headline-grabbing deals.
“It almost seems inevitable at this stage that the base rate reduction could get passed on in full to savers over the next few months, but this then should be a signal for savers to shop around for a new deal.
“As we have seen time and time again, the biggest high street banks are unlikely to be matching base rate – let alone beating it, so this cut is the perfect excuse to pay out less in interest to consumers.”
Steven Cameron, pensions director at Aegon, said that, at a time of stock market volatility, the rate cut does “pose particular challenges for those approaching retirement”.
Mr Cameron said: “The recent fall in the stock market will mean those whose pension is primarily invested in stocks and shares will have seen their pension pot fall in value. The reduction in interest rates creates a double whammy as annuity rates are also likely to be cut.
“As a result of the pension freedoms, individuals with defined contribution pensions now have flexibility over when they start taking a retirement income and can choose to remain invested, drawing an income, rather than buying an annuity.
“While there is no guarantee around if and when fund values and annuity rates will bounce back, individuals about to retire might want to seek advice on their options, including potentially deferring locking into annuities at a particularly adverse point in time.”