As a result of a reduction in the base rate, existing borrowers on base rate tracker mortgages should see their interest rate go down in line with the Bank of England base rate.
This is because where the terms of the mortgage state the base rate is followed, as in the case of most tracker mortgages, lenders must pass on the base rate cut.
The only exception is where there is a rate floor stipulated in the mortgage contract.
Where discretionary variable rates apply – for those customers on a lender’s SVR for example – lenders can decide how to act.
However, fixed rate mortgages will remain as per the terms and conditions of the original contract, offering borrowers the stability they initially applied for by opting for this type of deal.
For new borrowers, if a saving of the new Bank of England (BoE) base rate is passed on by lenders to their products, borrowers of new mortgages will see cheaper interest rates than they could have expected before the decision was made to reduce the base rate.
Lee Travis, head of professional development at the Society of Mortgage Professionals, says this could apply to both variable and fixed rate deals.
However in the aftermath of the financial crisis, Mr Travis points out some SVRs did not fall in line with the Bank of England base rate.
But he says the recent base rate decision has the added benefit of the term funding scheme, which will enable lenders to borrow money at or close to the new 0.25 per cent base rate – therefore incentivising them into passing the saving on to consumers.
Mr Travis says lenders may also come under pressure to pass savings on at the moment because many competitors quickly announced rate reductions following the Bank of England decision.
He says: “The important consideration will be the date that any savings are passed to consumers because this would not necessarily be immediate (for example it could be the month following the Bank of England’s decision to reduce the base rate).”
