How the Base Rate is Effecting the UK Mortgage Market

The Bank of England has slashed the Base Rate in previous months to an all time low. The reasoning behind this was to alleviate some pressure on current home owners and to help rejuvenate the financial economy hoping the banks would begin to lend money again. It is still too early to tell if the drastic measures of the Bank of England were necessary, but the short term effect show okay results.

For those individuals that have a variable, or floating, rate mortgage, the reduction in base rate will increase their cash flow significantly. If you have a £500,000 mortgage and were paying 1% above the Base Rate, your mortgage payment in September 2008 would have been £2997. In June 2009, your mortgage payment would be £1,725. The change in base rate will save you £1,272 per month in mortgage payments.

The Bank of England was hoping that the savings in mortgages would help consumers spend the saved money in other areas, such as the automobile industry or the retail industry. Unfortunately, statistics have not shown a considerable increase as of yet. Most experts believe that it is because people are concerned about the future and are saving their money. Unfortunately, the low base rate means that savings accounts are paying practically nothing in the way of interest.

While the base rate has helped those on a variable rate, it has made those people with a fixed rate mortgage look into remortgaging their property. Fixed rate mortgages, while safer in a time of rising rates, are not nearly as attractive looking right now, in this time of decline. As mentioned previously, with a savings of potentially over £1,000 per month, it is worth it for those on a fixed rate mortgage to seriously consider looking into remortgaging.

It is an uncertain time and the economy is still struggling, but no one knows how low the Bank of England is willing to cut the Base Rate. As of June 2009, it can not go much lower. Even more caution is given to thinking about when the Bank of England will raise rates. This is more concerning to individuals with variable rate mortgages. The unknown nature of the rates market is what makes it so frustrating, yet so exciting.

Once the rates begin to rise, more people will want to obtain a fixed rate mortgage, so that their mortgage payments do not start to increase every month. It is knowing when to make the change that is the big gamble. If you make it too early, you lose out on taking advantage of extremely low rates. If you make the switch too late, your fixed rate will be higher.

Currently the low base rate is affecting the remortgage area of the UK mortgage market the most. It is allowing those on a fixed rate to take advantage of a lower variable rate. Until banks begin to lend significant amounts in the consumer market arena, the effect on new mortgages will not be seen.