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How the latest interest cut affect you?

How the latest interest cut affect you?

How the latest interest cut affect you?
£22 off a typical mortgage.
£25 less in interest a year on a £10,000 savings pot

After almost endless speculation, the Bank of England has announced a cut in interest rates to 0.25%. So, how will the move affect you?

Generally, a Bank rate cut is regarded as good for borrowers – particularly those with a mortgage – and bad for savers.

Millions of people in the UK fall into both categories, so what aspects of the family budget do they need to review?

Mortgages

A mortgage is by far the biggest debt taken on by the majority of households in the UK.

An estimated 11.1 million households have one. The typical amount still left to pay on each home loan in the UK is £116,000, according to the Council for Mortgage Lenders.

Using Office for National Statistics (ONS) house price data, a cut to 0.25% means a £22 monthly reduction in the bill for a variable 25-year repayment mortgage on a typically priced home of £211,000 having taken a 20% deposit into account.

So that is a £22 cut on a monthly mortgage bill of about £779.

Key to when this saving is made – if at all – depends on the kind of mortgage that people have.

Those who will see an immediate benefit are those on Bank rate tracker mortgages – in other words, home loans with an interest rate that goes up or down in direct relation to the Bank of England’s decision.

One in five mortgage holders have this type of loan.

Approaching a third of mortgage holders (29%) have home loans that are on the standard variable rate – the default option after a fixed term has run its course.

They will be in the hands of the lender. Some mortgage providers may pass on the cut in full, some may decide on a partial cut, others may make no change at all given the historical low levels on interest rates.

A handful of banks quickly announced that they would pass the cut on in full from September, with others expected to follow suit. A separate scheme announced by the Bank – called the Term Funding Scheme – is designed to ensure that banks pass on the rate cut.

In fact, Bank governor Mark Carney said banks had “no excuse” not to pass on the cut to households.

Finally, there are those on fixed rate mortgages – equating to nearly half (46%) of all mortgage holders.

They will see no change. However, if their mortgage term is up soon, they may find they pay less if and when they sign up to a new one. Fixed mortgage rates on new deals have been falling – even when there was no change to the Bank rate.

An increasing number of people have signed up to longer term fixed rate deals – locking them in for up to 10 years. For them, this change is fairly irrelevant.

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