What the emergency interest rate cut means for your money and mortgage

The Bank of England has announced a shock cut in interest rates to help shore up the economy as the deadly coronavirus continues to sweep through the UK.

On Wednesday morning, the Bank's Monetary Policy Committee slashed rates from 0.75% to 0.25%, taking borrowing costs back down to the lowest level in history.

Policymakers said the cut was a response to the "economic shock" of coronavirus and would "help to support business and consumer confidence at a difficult time, to bolster the cash flows of businesses and households, and to reduce the cost, and to improve the availability, of finance".

The last time the base rate was cut was back in 2016, when it fell from 0.5% to 0.25%. Since then it's risen twice to reach 0.75%. But interest rates have generally been at historic lows since the 2008 financial crash.

Bank of England Governor Mark Carney said this morning that the economic impact from coronavirus could be "large and sharp'' and economic activity will likely weaken materially in the coming months.

It comes just hours before new chancellor, Rishi Sunak, is expected to announce further measures to support the economy over the next year, including emergency plans to help the self-employed as the outbreak contiunes.

A cut in interest rates means good news for borrowers and bad news for savers – as it means they'll earn less on their cash.

Under today's emergency cuts, some mortgages will get cheaper, therefore boosting the money in our pockets each month.

Homes with tracker mortgages should see their rates drop – as these mortgages fluctuate alongside the base rate.

However, if you've got a fixed rate, your monthly payments won't change.

Standard variable rate (SVR) mortgages may change – these are the default plans many 'mortgage prisoners' are trapped on, and the rates people get defaulted onto at the end of their fixed deal.

This move is at the lenders' discretion though – banks don't have to change these rates in line with the Bank of England.

SVRs are pricey, so if you're on one, don't automatically stick with it even if your rate is cut – see our guide on how to remortgage, here .

Those on tracker mortgages are likely to see their monthly costs fall.

As the name suggests, these 'track' the base rate, so mortgage costs should drop by an average £20 a month on a typical £150,000 mortgage. 

A small number, however, won't see rates drop where their deal has what's called a 'collar', which prevents rates falling below a certain level.

You should be contacted by your lender if you're impacted.

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."

I'm about to apply for a mortgage – what do I need to know?

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Mortgages are currently at historically low levels – so it may be worth locking in a cheap, fixed deal to take advantage of it.

A good mortgage broker will be able to talk you through these options in greater detail.

Fixed-rate mortgages provide a temporary safe haven from rate rises as they guarantee a fixed interest rate for a set period of time.

The current climate would be a good time to lock in a low deal, however, bear in mind that if you take out a fixed-rate mortgage and the base rate drops, you won't benefit from reduced payments.

What about savers?

While today's announcement should help give businesses and the economy some relief, it won't be good news for savers.

Savings rates have been extremely low for years and are now likely to drop further, although if you've a fixed rate account you should be safe.

If not, it's time to reconsider your savings account.

Andrew Hagger of Moneycomms, explains: "Many households are on fixed rate mortgages so won't feel any financial benefit as a result of todays news.

"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 peoples finances.

"Savers will be holding their breath and hoping that the already pitiful rates they receive aren't slashed further."

How exactly does the base rate work?

When the Bank of England lends cash to commercial banks, the banks must pay interest, and the amount is determined by the base rate.

The base rate will also impact ‘Swap’ rates, the interest rate banks charge when lending to each other.

If the base rate rises or falls, lenders often pass these costs on to consumers by amending their own interest rates on loans or savings products.

While that might sound complicated, it essentially means the base rate will impact on two areas of your finances: how much interest you can earn on your savings and how much it costs to borrow money.

Broadly speaking, a lower base rate is good news for borrowers because the rate of interest they repay is likely to be lower – however this will depend on a number of factors such as what time of loan you take out and your credit score (which measures your risk factor).

A higher base rate is good news for savers, who will earn better returns. The current low base rate means that some mortgage deals are at historically cheap levels.

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