What today’s base rate cut means for your mortgage
The Bank Of England has just announced that they have cut the base rate by 0.25 points taking it to 4%. But, as with every cut, what does this mean for your mortgage and what do we predict moving forward for the housing market in Chester? In our latest blog, we are going to take a stab at answering these questions and remember, if you have any questions for us, reach out to our award-winning team!
What is the interest rate?
In its simplest terms, an interest rate is the cost of debt for the borrower and the rate of return for the lender. The money to be repaid is usually more than the borrowed amount since lenders require compensation for the loss of use of the money during the loan period.
For example, if you take out a loan of £100 from the bank with a 4% interest to be paid back, you would give the bank, £104 back.
Why does this matter?
Those pesky things called mortgages all revolve around the interest rate. But it gets a little more complicated so take a moment and sit back.
There are two main types of mortgages. Fixed and Tracker.
A fixed mortgage actually means that the term of your deal is tied to an interest rate set by the lender. So, for example, you may have a £100,000 mortgage over 27 years and your deal is for 5 years at a fixed rate. The interest rate you pay is the deal you sign up for, and it may be that you get a deal at 3.5% and not the 4% you see as a topline figure.
Simply put, the deals are predictions by the bank where the interest rate will be in a few years’ time. So the interest rate could go to 4.75% and then drop to 3%. In 5 years, it may be an average of 3.5% and this is great for the lender and you.
Whilst a tracker mortgage is tied to the interest rate the Bank of England puts out. So in the same example as above, your rate is dependent of the changes the Bank of England makes. So one year it could be 4% and another means it could be 5% or 2.5%.
Sometimes tracker mortgages have an associated fee but you will need to see each package individually to make your best decision.
OK, so what does this mean for buying a home?
Your mortgage rate will influence how much you pay back. Before you purchase a house, having a mortgage in place is a requirement if you are not a cash buyer – i.e. you can pay outright for the home.
When the interest rate changes, that doesn’t necessarily mean that the deal you signed will change. However, mortgage brokers can switch you to a better deal if something comes along.
What does this mean for the housing market in Chester?
A reduction in rates usually sees a positive swing for selling once it trickles down to the long term forecast of interest rates.
“We don’t see anything instantly but, within a few weeks we do notice that demand upswings because the loan is more affordable and people feel more confident that they can purchase a home.” Gareth Friend, Director.
“The most important thing is that people find the right home within their budget. Going broke to buy that dream home isn’t something I’d ever advise!”
What should I do now that the rates have come down?
Firstly, don’t panic. If you’re in a deal and buying a home, speak to your lender. They may offer a better product which makes your mortgage payments more affordable. If you’re using a broker – which we recommend – then give them a call.
They will be aware of changes to the deals and any new ones which could really make a difference to your payments.
And finally…
Talk to us. If you have any concerns or find yourself in a more competitive position to purchase, then give us a call. We can help find you a property or help sell yours if, as we predict, demand will increase over the next few weeks.