The coronavirus pandemic has precipitated some major changes to the situation of homeowners in the UK.
In less than two weeks the Bank of England has twice lowered the base rate of interest to where it now sits at a record low.
In collaboration with the financial industry, the Government announced a three-month mortgage holiday for customers struggling as a result of COVID-19.
Mortgage lenders are having to react quickly, with implications for existing customers and first-time buyers.
Here, OnTheMarket explains what the changes mean for homeowners.
Bank of England cuts interest rates because of coronavirus
On 19 March 2020, the Bank of England announced it was cutting the base rate of interest from 0.25 per cent to 0.1 per cent, the lowest level it has been in the near 326-year history of the institution.
The announcement was made following an unscheduled special meeting of the bank’s Monetary Policy Committee, cutting the rate by 15 basis points from where it had been at 0.25 per cent.
In its statement accompanying the announcement, the bank said it was making the unprecedented move in response to “an economic shock that could be sharp and large, but should be temporary” caused by COVID-19.
The move came little more than a week after the rate was lowered 50 basis points from 0.75 per cent to 0.25 per cent in an announcement on 11 March.
The cut was made the same day as Chancellor of the Exchequer Rishi Sunak announced a Budget with a strong focus on dealing with the coronavirus pandemic.
Savings tracker mortgage customers could make during coronavirus
Most customers on a tracker mortgage, whose rates goes up and down in line with the Bank of England base rate, will see an immediate cut to their mortgage payments.
Taking in the two rate cuts announced by the bank in the last two weeks, some borrowers could see their repayments cut by 0.65 per cent.
This would see someone with a £100,000 loan saving £650 a year – and a customer with a £300,000 loan saving £1,950 a year.
But not all customers with tracker mortgages will benefit to the full extent of the 0.65 per cent cut as many lenders put floors on their products preventing the rate from falling below a certain level.
What about variable rate mortgage customers during coronavirus?
Standard variable rate (SVR) mortgages are the products homeowners are automatically transferred onto once their initial fixed-term deal finishes.
The rate for SVR customers is at the discretion of their lenders and a number had agreed to pass on the 0.5 per cent rate cut announced on 11 March to their customers.
But it remains to be seen whether the latest 0.15 per cent cut will result in further rate reductions for SVR customers.
How will coronavirus affect fixed rate mortgage holders?
By definition, existing fixed rate customers will not benefit from the interest rate cuts because their rates are locked in for the duration of their deal regardless of any movements in the base rate.
But when their deal finishes they may be able to lock into a much lower rate if they shop around.
This all depends on whether lenders decide to pass on the cuts in the base rate to new customers.
There will likely be some good deals out there but a volatile market is difficult to predict and some lenders may in fact be inclined to raise repayment levels on fixed rate deals in the immediate term.
What if I want to re-mortgage during the coronavirus pandemic?
This could be a great time to do it. Simon Gammon, Managing Partner at Knight Frank Finance, said: “The second cut to the Bank of England’s base rate in a matter of days means anybody on a tracker mortgage will see an immediate cut to their outgoings.
“In many cases it will gradually feed through to fixed-rate products, but with lenders under financial pressure brought on by the spread of COVID-19, their approach is unlikely to be uniform.
“Activity in the mortgage market was already at a four year high before the first rate cut to 0.25 per cent. It’s likely this cut will underpin further activity in remortgaging.”
Read more
- How will the three month coronavirus mortgage holiday work?
- Coronavirus eviction law: Renters protected for the next three months
- The Budget 2020: What it means for the property industry
Paresh Raja, Chief Executive at Market Financial Solutions, added: “The Bank of England’s decision to cut interest rates is not wholly surprising given the actions of other central banks in recent days.
“For property owners and first-time homebuyers, this means there is a brief window of opportunity to secure a competitive mortgage with low interest rate repayments.”
The volume of new deals on offer could decrease as lenders contend with reductions in staffing levels caused by coronavirus.
Barclays for example has already announced it will limit the number of mortgage applications it will accept.
And first-time buyers during coronavirus?
The property industry is facing many challenges because of coronavirus and this is undoubtedly having an effect on the chances for first-time buyers of getting on the property ladder.
But lenders are still keen to hear from first-time buyers, for example West Brom Building Society which is removing its remortgage range to concentrate on those looking to buy a home for the first time.
A spokesperson for the lender said: “We’re taking precautionary steps and temporarily suspending our remortgage products.
“In the short-term, our priority will be for those who still wish to purchase a home.
“We believe this is a responsible approach and we’re committed to continuing to service our customers.”
The coronavirus mortgage holiday
On 17 March Chancellor Rishi Sunak announced a three-month coronavirus mortgage holiday aimed at helping those in financial difficulty as a result of COVID-19.
Customers will not automatically see their repayments frozen and have to apply for the loan payment holiday if they want a break from making repayments in the short term.
Only those who are up to date with their mortgage payments and can prove they are affected by COVID-19 will be considered for a loan payment holiday.
Mortgage-holders entering into a coronavirus mortgage holiday will still accrue interest during the three month period, which they can either decide to pay back in full at the end of it or add to their total mortgage balance across its lifetime.
The Financial Conduct Authority has said customers should not be charged any additional fee for taking a loan payment holiday and there ‘should be no negative impact’ on credit scores.
The coronavirus mortgage holiday is available to buy-to-let mortgage holders as well as live-in homeowners.
With reports of long waits for customers trying to get through on the phone, some lenders have created online forms or special e-mail addresses for those wishing to apply for a coronavirus mortgage holiday.
Saving during the coronavirus pandemic
The latest base rate cuts to a historic low are more bad news for savers.
Paresh Raja says, “For those relying on a traditional bank account to build up their savings, these latest cuts will come as a blow.
“Interest rates have been hovering below one per cent for over a decade, making it extremely difficult to build a sizeable savings pot in a traditional savings account.
“This latest news will no doubt compel many to re-evaluate their current investment strategy and consider what could be done to ensure they are not being negatively impacted financially by trending events like coronavirus.”
