What Bank of England's interest rate cut means for your mortgage

The Bank of England has announced a cut to interest rates today (November 7). The central bank has reduced the base rate from 5 percent down to 4.75 percent - which is a positive move for mortgage holders.

The base rate, which influences how much banks charge you when you save and borrow money, is set by the Monetary Policy Committee who meet eight times a year to decide what action to take. In the latest meeting, the committee voted by a majority of 8 to 1 to lower interest rates.

The latest reduction comes as the bank says inflation is 'close to the 2 percent target', but that they will 'not cut rates too quickly or too much'. It also adds that 'if things evolve as expected, interest rates will continue to fall gradually.'

READ MORE: 'We have to cancel our retirement and pay £25k after our flat was put on Airbnb illegally'

Today's news will be welcomed by many homeowners who may now expect to see their mortgage repayments fall. If the central bank's rate changes, then banks usually change their interest rates on both saving and borrowing.

How much the base rate reduction will affect your mortgage depends on the type of mortgage that you are on. John Fraser-Tucker, head of mortgages at mortgage broker Mojo, has explained the likely impact of this reduction on mortgage borrowers across various product types:

Those on tracker mortgages could save £1,416 over two years

"Borrowers with tracker mortgages will see an immediate benefit from this rate cut, resulting in lower monthly payments. For instance, consider a 75 percent loan-to-value (LTV) mortgage over a 25-year term for an average-priced house (£267,500)," John explained.

"When the base rate was 5 percent, the average monthly payment would have been £1,172. With the base rate now at 4.75 percent, the predicted mortgage payment drops to £1,143 - a monthly saving of £29, or £696 over two years.

“While this may seem like a modest amount, it represents a significant financial improvement compared to when the base rate was 5.25 percent prior to the first reduction on August 1st. In that scenario, the average monthly payment would have been £1,202—meaning borrowers would have paid £59 more each month than they will now, which amounts to £1,416 over two years.”

Those on fixed-rate mortgages could see a 0.2 percent drop - as witnessed with the last BoE base rate reduction

“Due to their stability, fixed-rate mortgages are the most popular mortgaged type, with nearly three-quarters (74%) choosing this option. However, with this stability comes no changes for those currently on a fixed-rate mortgage - your rate won’t change until your mortgage deal ends," John explained.

“However, for those looking to enter the property market soon or nearing the end of their fixed-rate term, today’s base rate reduction is extremely positive news. We expect to see more affordable fixed-rate deals becoming available soon, which can significantly affect how much you pay per month.”

"For example, when the last BoE base rate was reduced on August 1st, we witnessed considerable drops in mortgage rates across the top six big lenders within just four weeks:

• 2-year fixed rate (75 percent LTV) fell from 4.92 percent to 4.72 percent
• 5-year fixed rate (75 percent LTV) decreased from 4.49 percent to 4.29 percent."

Those on a standard variable rate (SVR) mortgages should speak to a mortgage broker

“The standard variable rate is a lender's default interest rate, typically applied when an initial mortgage deal ends. With today's base rate reduction, we expect lenders to adjust their SVRs downward in the coming weeks," he said.

“However, it's crucial to understand that SVRs are often significantly higher than other available rates. For instance, last week, while the average SVR across the big six lenders was 7.25 percent, the average 2-year fixed rate stood at 4.52 percent, and the average 5-year fixed rate at 4.16 percent.

“If you're currently on an SVR or unsure about your rate, I'd encourage you to review your mortgage statement. Look for sections labelled 'interest rate' or 'current terms'. Many borrowers may not realise they're on this potentially higher rate."

John added: "For first-time buyers who have been waiting patiently for a more favourable environment, this could finally open the door to homeownership. Not only are mortgage rates expected to decrease, but first-time buyers also have until March 31 to take advantage of stamp duty relief, which allows you to purchase your first property without paying stamp duty on homes valued up to £425,000."

Speaking about the interest rate cuts' impact on mortgages, Paul Noble, CEO of Chetwood Bank said: “This is very welcome news. Following the Budget in which property ownership came under the spotlight, today’s decision brings some positivity to the mortgage market.

“Ultimately, it’s the cost of borrowing that will be the major influence on people’s property-buying plans, so today’s cut – and the hope of more – will encourage greater market activity among landlords and homebuyers in the coming months."

Ross Turrell at CHL Mortgages also said: “Today’s rate cut injects some much-needed positivity back into the mortgages and property market after the turbulence stemming from last week’s Budget. It also highlights the variety of trends and challenges that UK landlords are currently having to navigate. On one hand, rates are falling while property prices continue to creep upwards; on the other, new regulations and tax reforms are sparking questions about how best to manage portfolios."