The Bank of England slashed interest rates in March as the impact of coronavirus became clear. While itâs not good news for savers, it could offer an opportunity for mortgage payers to slash their bills.
The Bank of England base rate is what the central bank charges banks for lending. As a result, it has a knock-on effect on the interest we earn on savings and the cost of borrowing. For most of us, a mortgage will be the largest loan we ever take out. Even a seemingly slight change in the interest rate can mean significant savings, especially when you look at the cost over the full mortgage term.
Since the 2008 financial crisis, the Bank of England base rate has remained at a low. Itâs piled pressure on savers but it has meant that borrowers have been able to secure good deals.
In November 2017 and August 2018, the base rate increased by 0.25% each time as the economy began to recover from the effects of the banking crisis. It was widely expected that gradual increases would continue in 2020 as GDP strengthened. However, the Covid-19 pandemic, and subsequent economic impact, changed that.
Coinciding with the 2020 Budget, which focused heavily on providing support during the pandemic, the Bank of England announced it was cutting rates from 0.75% to 0.25% on 11th March 2020. Just a week later the base rate was slashed further to 0.1%, a historic low.
After more than a decade of low interest rates, the rates have become ânormalâ. But looking at the long-term average, interest rates have typically hovered around 6%, over the last few decades there have been several times where theyâve exceeded 10% piling pressure on borrowers. So, if youâre a mortgage payer now, the lower interest rates could present a great opportunity.
The impact of interest rates on your mortgage repayments
Even small changes in the interest rate you pay on a mortgage can have a big impact on your outgoings. Letâs say you have ÂŁ200,000 remaining on your mortgage and a term of 25 years:
- An interest rate of 2% would mean monthly payments of ÂŁ848 and the total cost of the mortgage adding up to ÂŁ254,313
- If the rate of interest increased to 5% monthly outgoings would rise to ÂŁ1,169, taking the total cost of the mortgage to ÂŁ350,754
As a result, a rise of âjustâ 3% in the interest rate would mean paying almost ÂŁ100,000 extra on your mortgage. The low interest rates present an opportunity for homeowners to reduce costs or make overpayments to pay off their mortgage quicker.
If your current mortgage deal has come to an end, the recent cuts by the Bank of England could be perfectly timed for you. If your current mortgage deal has expired, whether it was a fixed or variable rate mortgage, itâs always worth checking what other deals are available. You will often have been moved onto the lenderâs Standard Variable Rate, which is unlikely to be competitive.
7 things to do before you remortgage your home
- Gather your mortgage paperwork: Before you start looking for a new mortgage deal, make sure you understand how much you still owe and what your existing interest rate is. Itâs essential to have a clear comparison and to double-check how much youâll need to borrow. It can help speed up the process too.
- Have you home valued: Since buying your home itâs likely that the value has changed, sometimes considerably. If the value of your home has increased, this will mean you own a greater portion. This is important when it comes to looking for a mortgage as the lower the loan-to-value ratio the better deal youâll be able to secure.
- Check your credit score: Your credit report and score are important when youâre a first-time buyer, and itâs no different when youâre looking to remortgage. Potential lenders will use your credit score to assess how likely you are to default on payments. If you have a high ratio of debt or other red flags on your report, taking some time to correct these where possible can help reduce overall mortgage costs.
- Understand what you can afford: When remortgaging your monthly outgoings typically fall. But there may also be an option to release equity from your home. It can be an attractive option and may allow you to undertake renovation or extension projects, for example. If youâre interested in borrowing more, be aware that repayments or the length of your mortgage may increase.
- Search the market: There are hundreds of potential lenders to choose from, including those without a high street presence and searching the market can be a challenging and time-consuming task. However, choosing the right mortgage provider for you is important for securing a competitive deal. Lenders have individual criteria so the one that was right for when you last took out a mortgage may no longer be the best option. Weâre here to help you search the market with your circumstances and criteria in mind. Contact us today to find out more.
- Start looking at deals early: Most lenders will allow you to secure a rate with them three to six months before your current deal ends. Searching now, whilst interest rates are low, can help lock in savings. It also means the transition will be smoother and you wonât have months in between the two deals where youâre paying a higher interest rate.
- Check for potential repayment charges: Make sure you know when your existing deal ends and line up the new deal to follow this. Many mortgages have an early repayment charge that could cost thousands of pounds if you remortgage before the end date.