Base rate and Remortgages
What does the base rate cut mean for people looking for a mortgage or remortgage? Taking the base rate to its lowest in over a century, December’s rate cut gave homeowners and home-buyers all over the UK a good reason to cheer up as they entered the festive season.
Homeowners on SVR (Standard Variable Rate) mortgages from Lloyds TSB / C&G (Cheltenham & Gloucester) had the most to celebrate, as they were the only ones who’d seen their SVR mortgage come down by the entire 2.5% cut we’d seen recently (the 1.5% in November and the 1% cut in December). Having said that, a lot of people on SVRs had also seen their payments come down – just not by the full 2.5%.
And lots of people with a tracker mortgage also saw their rate come down by the full 2.5%. Lots of them – but not all of them, as some tracker mortgages come with a ‘collar’, sometimes called a ‘floor’. This is a minimum rate: however low the base rate goes, the tracker won’t follow it down any further!
Collars are nothing new, but when the base rate was higher it simply didn’t occur to most people to look into it: someone signing up to a tracker deal in 2007 when the base rate stood at 5.75% probably didn’t think it would drop low enough to make the collar an issue. Now that the rate is down to 2%, though, collars have become an annoying reality for homeowners who expected to reap the full benefits of the base rate cuts.
Even so, some people on fixed-rate deals will still be weighing up the benefits of switching to a tracker. True, they are likely to end up paying as much as 2% more than the base rate (a lot more than the ‘base rate + 0.3%’ tracker deals which were common a year or so ago), but a two-year tracker mortgage (currently at 4%) can still sound a lot more appealing than a five-year 6% fixed-rate mortgage.
However, this may not be a good idea. A lot of mortgages come with arrangement fees and early repayment charges, so simply comparing the cost of the 4% mortgage with the cost of the 6% deal won’t give a full picture of the financial impact. They’d have to take into account the cost of leaving one mortgage – and starting another.
Anyway, what happens if the base rate starts shooting up? Will they be able to leave the tracker deal, or would this come with a hefty early repayment charge? And what happens when the tracker deal comes to an end? Will there be any good fixed-rate deals to switch back to, or will they end up paying the lender’s (often more expensive) SVR? In the long run, they may have been better off sticking with their original fixed-rate deal.
For many people on fixed-rate deals, of course, all the talk of base rate cuts can seem pretty irrelevant. Their fixed rate won’t change, whatever happens to the base rate. Unless they can find a mortgage deal that’s good enough to tempt them away from their fixed rate, it won’t make any difference to them until they come to the end of their mortgage term – and by then, almost anything could have happened…