How the base rate cut will impact homeowners
The recent vote to leave the European Union has sent markets on something of a roller-coaster ride, as speculation and uncertainty prevails. With the unwinding of Britain's EU membership set to take a number of years, the long-term implications are impossible to judge, prompting many borrowers to look for some stability.
The weaker economic outlook has already led to the Bank of England reducing base rate to 0.25%, and the Monetary Policy Committee's comments hinted that further cuts could be on the cards later in the year.
Even before the cut to Base Rate, there had already been a reaction in mortgage rates. With expectation of lower rates for longer, the funding costs for lenders pricing fixed rate deals have plummeted.
That has fed through into the fixed rates on offer to homeowners and buyers. It's been particularly evident in the long term fixed rate market where a flurry of rate cuts saw ten year fixed rates drop to a new all time low, in some cases below 2.50%.
Being able to lock in for such a long time at such low rates certainly sounds appealing and will insulate borrowers against any hikes in the future.
Is there a downside of fixing for ten years?
A ten year fixed rate won't be for everyone, even when they are at such competitive rates. Most deals will carry early repayment charges throughout the duration of the fixed rate and that could limit flexibility, if there's a need to review the mortgage at a later date.Although most deals will allow the mortgage to be taken to a new property, there is no guarantee that the lender will be able to meet any new borrowing requirement at that time, or what rate they could offer for any additional borrowing. With some early repayment charges as high as 6% of the amount repaid it could be costly if a new mortgage has to be sought elsewhere.
Those that don't foresee any real need to alter their mortgage could put some real certainty into their mortgage payments during an uncertain period.
It would be easy to imagine someone with 10 years left on their mortgage, and no plan to move home, liking the fact that they can lock down their mortgage payment at extremely affordable levels.
Similarly, those making the move to their new 'forever' home may grab the chance to remove any worry about the ups and downs of interest rates over the next decade.
Long term fixed rates could appeal to landlords who are keen to lock in their mortgage rate at a low point. That could really help button down one of the significant costs of a property and give them surety over the longer term, rather than worry how costs might fluctuate in relation to the rental income. That's only likely to become more important as the changes to tax relief on mortgage interest take effect from next year.
Of course, that security needs to be balanced against the higher interest rates that apply to ten year deals than could be found on a shorter term product. There is also much less choice in long term fixed rate deals in the Buy to Let market which limits the options.
Those that are more hesitant about locking in for so long need not worry. Lenders have also lowered a number of 5 year fixed rates so mortgage deals continue to look ultra competitive across the board and there should be something for everyone.
Even though there is a lot of uncertainty at the moment, mortgage borrowers can at least take practical action and have a great range of competitive mortgage options to choose from.
Parkers have teamed up with L&C Mortgages, the UK's largest fee free mortgage broker. They will never charge you a fee for their mortgage advice. They will conduct a search across the market to find you the best possible deal. They are also able to give you a decision in principle without credit scoring you.
Speak to L&C mortgages on 0800 923 2045 or request a call back by clicking here.