Brexit: What’s the latest, and how does the interest rate cut affect homeowners?

brexit-interest-rate2After the political whirlwind of the last couple of months, it appears the country’s immediate future may be becoming a little clearer.

Now that Theresa May has taken office as Prime Minister, she will agree the government’s negotiating position before she triggers Article 50, and officially starts the clock on the UK’s exit from the EU.

According to the latest speculation, it seems unlikely this will happen before the end of the year but she announced “Brexit means Brexit and we’re going to make a success of it.” David Davis has been appointed as Secretary of State for Exiting the European Union and will lead negotiations for Britain to leave the EU, while trying to maintain access to the single market.

While it may be some time before everything becomes clear around the financial and economic impact of Brexit, the recent announcement from the Bank of England (BoE) around reducing interest rates to 0.25% is likely to impact many of us.

Interest rates were last lowered to 0.5% in March 2009. This is the lowest they’ve been on record.

Why have interest rates been lowered?

Because of a number of reasons, the pound has fallen to a seven year low against the dollar, and has slipped against the euro. When the BoE lowers interest rates it’s typically done to boost the economy.  

How could lower interest rates benefit me?

Lower interest rates mean savers are worse off than borrowers. This is because they’re not generating lots of interest on their savings. Spenders however are paying lower interest on credit making borrowing cheaper.

Five years ago, the average mortgage interest rate was 3.84%. Today, you could get interest rates as low as 0.99%.

This table shows what this could mean to your disposable income. The calculations have been worked out on a 5 year fixed mortgage for £220,000 spread over 30 years, with a £1,000 arrangement fee (the fee the mortgage provider charges).

Figure 1: What interest rates could mean for your disposable income

 

Interest rate

3.84%

2% 1.15%
Repayment cost p/month £1,030.12 £813.16 £772.87
Total cost of borrowing (over deal period – inc. fee) £62,807.33 £49,789.77 £44,372.03

(Source: Figures from the mortgage calculator on This is Money)

Typically, if you have a higher house deposit you should get a better rate.

Does this mean I should buy a house?

It’s very easy to get excited and think ‘let’s go out and buy a house right now’,  but please stop and think. Look at figure 1 and assess what happens if interest rates rise. Can you still afford it?

Related article: How prepared are you for an interest rate rise?

Also, since the last recession the government have introduced mortgage affordability rules which mean mortgage providers have to go into a lot of detail about your income and outgoings.

Your income will be analysed and evidenced – there is also likely to be increased scrutiny for those who earn commission, bonuses or are self-employed. You may be asked questions around:

1.       Income, retirement plans and family situation – how many years would you like to pay your mortgage over, when would you like to retire, what is your income and how many children do you have?

2.       Bills and regular outgoings – what will you be paying for utilities (gas, electricity and water bills), TV and phone packages, council tax, insurance (life, home, car, pet etc.), essential travel (such as getting to work), housekeeping (e.g. food, toiletries etc),  maintenance for a child or spouse, school or college fees and regular saving and investment contributions.

3.       Debts – what other mortgages or secured lending do you have, do you have personal loans and hire purchase agreements (such as a car) and what are your credit card balances?

4.       Your lifestyle and money management – what are your spending habits; or do you have large one off payments?

What could I do in order to prepare to get a new mortgage or to re-mortgage my property?

  1. Create a budget and see how you’re managing your money. Based on the above, what could you do differently?
  2. If you can try to reduce or pay off credit card or loan balances as this could increase the amount you are eligible to  borrow, and can have an impact on  the mortgage rates available to you.
  3. Use an online mortgage calculator to see if you could afford an increase in mortgage rates.
  4. Sign up to CreditMatcher to see your free Experian Credit Score and compare mortgage options. We are a credit broker not a lender, working with selected lenders.†

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