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March 2020 saw some interesting changes for the Bank of England’s (BoE) base rate. On the 19th March, it was cut to 0.10% after holding steady at 0.75% since the 2nd of August 2018. The BoE stated its reasons for the cut: it wanted to put more money into the pockets of homeowners and smaller businesses (through reduced mortgage payments) in the wake of the COVID-19 outbreak.
Of course, this change in the base rate raises important questions for people with mortgages. Is now a good time to re-mortgage, perhaps to find a lower fixed-interest mortgage? After all, the base rate cannot really go much further down than 0.10%! On the other hand, could it actually be a poor time to change your mortgage, given the wider economic instability caused by COVID-19?
In this article, our financial advisers here at Cedar House offer some answers to these questions. For more information and personalised financial advice, please contact our team via:
020 8366 4400 or firstname.lastname@example.org
Why is the new base rate important?
In general, a lower BoE base rate is to be welcomed by homeowners. This is because the interest rate you pay on your mortgage is likely to be lower.
On the other hand, a 0.10% base rate is unlikely to be greeted warmly by savers, since the interest generated by their savings accounts is now almost certain to go down.
Those with a fixed-rate mortgage will not see the interest on their monthly payments go down. This is because the interest rate was “locked-in” at the outset when you agreed on the deal with your lender (e.g. 5 years). However, if you are on a standard variable rate (SVR) or tracker mortgage, you will probably see your monthly payments reduce. Bear in mind, nonetheless, that your bank’s interest rate will not mirror the 0.10% of the BoE; rather, it will hang somewhere above it (e.g. +1%).
Banks pulling mortgage products
COVID-19 has not just affected the UK housing market by shifting the base rate. The outbreak and subsequent nationwide lockdown have also caused widespread anxiety within the banking sector. Unfortunately, it is no April Fool’s joke; at the time of writing, lenders are starting to withdraw the mortgage products offered to customers.
By the final days of March, for instance, Halifax had taken the majority of its mortgages off the market. Deals from Nationwide, Halifax and Barclays with a higher loan-to-value (LTV) ratio were particularly affected by early April, with 30% fewer mortgages on offer compared to three weeks prior. On the 31st March, one study estimated that there were 3,654 total residential mortgage deals on offer from building societies and banks; a significant drop from the 5,239 available on the 11th of March.
Should I pounce before it’s too late?
This market environment presents a difficult dilemma for homeowners looking to re-mortgage, and for first-time buyers. Should you take advantage of the low base rate and find a good deal before the range of mortgage deals on offer contracts even further? Or, should you hold off until everything settles down and the economy stabilises?
Complicating all of these questions is the wider UK lockdown. Even if you can find a property that you love as well as a good mortgage deal, the government’s self-isolation guidelines will not make it easy to complete surveys, attend meetings with the lender or sellers. Many banks are currently facing in-branch staffing issues, and they will be unable to send someone out to physically value a home. These government restrictions might be in place for a considerable amount of time; possibly three months or even longer.
For these reasons, it’s worth speaking with your financial adviser about your mortgage if you are considering a move into a new home. These plans might be best placed on hold for now, until further advice is forthcoming from the government and public health authorities. For those considering a re-mortgage, the situation is somewhat different.
Since you are looking to stay in your current home but hopefully lower your monthly payments by switching to a better deal, there are fewer hoops to jump through (although the restrictions are still significant). Bear in mind, however, that within the present market environment you will need a larger percentage of the equity to access the more limited range of deals on offer. On the 31st of March 2020, for instance, Nationwide was only offering mortgages to people with an LTV of 25% or higher; although the bank did say that ongoing applications for first-time buyers would not be affected.
This is a tricky balance to achieve right now for people thinking about re-mortgaging. The prevailing restrictions might be eased in the coming months as, hopefully, the COVID-19 outbreak is brought under increasing contract. By this point, however, the interest on mortgage deals might also go up as the range of mortgage products on the market might also expand, possibly in response to improving economic conditions. However, at the time of writing in early April, it’s impossible to predict when things will get better, and how the property market might react. It’s also conceivable that things could get worst later in 2020, possibly through a COVID-19 resurgence after the summer.
The future is always uncertain, yet right now that fact is brought into increasing focus as the markets (including property) react to COVID-19. The best course, as always, is to seek professional financial advice to ensure your financial planning decisions are based on accurate, up-to-date information.
If you would like to discuss your financial plan with a member of our team, then get in touch today to arrange a free consultation:
020 8366 4400 or email@example.com.