The guide explores what shapes mortgage rates, what will
happen if the Bank of England reduces the base rate to 0 per cent
and what advice you should give clients in the current low interest
What impact does the base rate have on mortgage
As a result of a reduction in the base rate, existing borrowers
on base rate tracker mortgages will see their interest rate go down
in line with the Bank of England (BoE) rate, unless a collar/floor
is applied by the lender.
Meanwhile, standard variable rate (SVR) mortgages may go down at
the lender's discretion and discount rate mortgages may also go
down (depending on any changes to the lender's SVR since these
types of mortgages usually track SVRs), unless a collar/floor is
applied by the lender.
However, fixed rate mortgages will remain as per the terms and
conditions of the original contract, offering borrowers the
stability they initially applied for.
For new borrowers, if a saving of a lower 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 BoE base rate.
This could apply to both variable and fixed rate deals.
The opposite would generally be true of an increment in the base
Do lenders have to pass on the base rate
For base rate tracker mortgages, yes they are obliged to pass on
the savings as per the terms and conditions of the original
mortgage contract (unless a collar/floor is applied).
SVRs (and therefore discount rate mortgages providing no
collar/floor is applied) may go down. These types of mortgage rates
generally follow market conditions, but can be at the lender's
In the aftermath of the financial crisis, some SVRs did not fall
in line with the BoE rate. However, 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 savings on to
Lenders may also come under pressure to pass savings on because
many competitors quickly announced rate reductions following the
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 BoE's
decision to reduce the base rate).
What other factors have an impact on mortgage
Savings rates:a factor that affects mortgage pricing is
the rate at which lenders borrow money from depositors. With
savings rates already so low, lenders may struggle to squeeze much
more margin from savings rates (even though savings rates are
expected to fall further).
Furthermore, with the BoE injecting capital into the market,
lenders are unlikely to increase savings rates as demand for saver
deposits will remain low. Therefore, whilst savings rates could be
an influence to mortgage pricing, this factor is unlikely to have a
significant impact on the pricing of mortgage rates at this
LIBOR rates:this is the rate at which banks lend to
each other, and is usually a good indication of banks' confidence
in each other. Changes in the LIBOR rate usually impact on the
pricing of short-term mortgages. The LIBOR rate has been fairly
stable since the EU referendum vote, potentially because of BoE's
quantitative easing measures. For this reason, whilst short-term
mortgages may become cheaper, the impact of LIBOR rates at this
time is unlikely to be considerable.
Swap rates:in short, these are contracts that the
lenders enter into in order to counter the risk of losing out by
lending money on long term fixed rates. Lenders essentially borrow
money from savers and lend it on for a profit. In order to ensure
no loses are incurred by lending this money on a long term fixed
rate (the risk being that interest rates could increase more than
anticipated on savings rates - thereby reducing the lenders
margin), lenders will enter into swap contracts, with parties of
the opposite needs. Following on from the result of the EU
referendum, swap rates plummeted. This could be seen as a good
indication that longer-term fixed rates are due to get cheaper.
Lenders' risk appetites:any factors that affect mortgage pricing
do not generally do so in isolation. The factors stated above
usually interlink to impact on lenders' mortgage pricing
strategies. Additionally, lenders have their own risk appetites and
profitability targets to consider. If property prices are expected
to fall in the wake of the UK's decision to leave the EU, lenders
may start to price higher loan to value mortgages differently to
something that may be considered lower risk.
Inflation:ultimately there is one factor that
influences most, if not all of the above: inflation. The BoE base
rate is set by the Monetary Policy Committee (MPC) to enable
inflation targets to be met. Whilst this particular objective seems
to have been abandoned somewhat in the wake of the 'Brexit' vote,
inflation (which has recently crept up to a 20-month high) could
cause rates to go the other way.
What impact should the prospect of zero per cent base
rate have on the mortgage advice market?
It is unlikely that there will be huge implications for the
mortgage advice market, although this should be viewed as positive
Clearly, what will happen to lenders' products and criteria
remains to be seen, but from an adviser's point of view, little may
change. Consumers seeking advice will still expect advisers to have
relevant market knowledge and the ability to assess their situation
and make suitable recommendations in these unprecedented times.
The recent change to the BoE base rate may have already prompted
many existing and potential borrowers to seek/re-seek advice. This
change should also have been used as an opportunity by advisers to
get in touch with their existing clients to ensure borrowers are
aware of the changes, what it means for them and whether making any
changes to their mortgage would be worth exploring.
An even lower base rate at zero per cent could be used as a
further prompt for advisers and clients to reconnect and possibly
make further savings.
What impact will the reduced base rate have on lender
Lenders' profits will probably diminish, due to losing out by
reducing variable rates for existing mortgage holders.
Additionally, their future profit margins may also be reduced, due
to having to offer new mortgages on lower rates.
However, lenders will take some comfort because the blow will be
softened owing to measures already taken by the BoE. Furthermore,
there is likely to be more economic stimulus provided if and when
it is required.
The good news is that lenders will have the capacity to absorb
these losses in profits, or else they would not be as keen to
reflect the BoE base rate savings to consumers.
What impact will the reduced base rate have on the
Advisers and consumers:as mentioned above, the
reduction in the base rate will have prompted many consumers to
seek advice. It is also a good opportunity for advisers to contact
clients to ensure they continue to meet their needs.
Variable rate (base rate tracker, many SVR and discount rate)
mortgage holders will be enjoying lower monthly payments and any
saving could be utilised to ensure that client's protection needs
are fully met. They may also benefit from a mortgage review, as it
could be beneficial for many consumers to fix their mortgage rates
at this historical low.
Likewise, fixed rate mortgage holders may also benefit from
advice. Due to mortgage rates dropping even more, it may now be
worth paying any early repayment charges to have a lower mortgage
interest rate - saving money in the long term.
Lenders:as interest rates squeeze mortgage lenders even
closer together in what is already a highly competitive market,
lenders will need to set themselves apart somehow to acquire
business and make up for lost profits.
There have already been some really exciting innovations in the
mortgage market this year, a great example of which is
'intergenerational' mortgages. A reduction in the base rate will
only help to keep this trend going.
We are also likely to see the launch of new products, such as
the recent plethora of 10-year fixed rate mortgages.
With cheap money available to lenders, they may even venture
into longer term fixed rates, especially with the benefit of the
term funding scheme made available by BoE as part of the most
recent economic stimulus package.
What impact will this have on affordability
Affordability is likely to become better for consumers if the
rate reductions are passed on to stress tests. This is illustrated
by a high street lender recently announcing that their stress test
will be reduced by 0.25 per cent.
The importance of stress tests, particularly affordability, came
to the fore after the introduction of the Mortgage Market Review
(MMR). Lenders are required to ensure that they assess a borrower's
ability to repay a mortgage now, and in the future. This means
lenders should be taking the impact of potential future interest
rate rises into account.
MMR requires lenders, when assessing affordability, to apply an
interest rate stress test that assesses whether borrowers could
still afford their mortgage if, at any point over the first five
years of the loan, bank rate were to be three per cent higher than
the prevailing rate at the beginning. A reduction in the SVR could
reduce the stressed interest rate a lender must apply, hence
In addition to the above, if a mortgage is fixed for five or
more years, the pay rate can be used as the stress rate. Therefore
instead of using a stress rate of seven per cent for instance,
lenders could choose to use a stress rate much lower than this (a
good five-year fixed rate can currently be obtained for around two
per cent). With low five-year fixed rates, many new ten-year fixed
rates and potentially room for even longer fixed rates, stress
tests could become much more lenient.
Could mortgage fees be set to increase?
At this time, this is a big unknown because we are yet to see
fully how lenders are going to respond to all of the recent market
activity. On one hand, in an environment where profitability is
reducing fast, it would not be surprising to see lenders increasing
their fees. They may increase fees and reduce rates to maintain
profitability whilst keeping the best headline mortgage rates.
On the other hand, the mortgage market is fiercely competitive
and there are currently no signs of any slowing down. It is
arguable that lenders will not want to lose their competitive edge
by increasing fees.
What should mortgage advisers do to make sure their
clients are getting the best deal in the current base rate
This is the ideal opportunity for mortgage advisers to reconnect
with clients and offer a full review to ensure needs are continuing
to be met and best client outcomes are being achieved.
Additionally, it is as important as ever for advisers to carry
out relevant and suitable CPD. Advisers should keep abreast with
all of the market changes to ensure that they are knowledgeable and
confident in talking to their clients about all of the recent
Advisers should also be aware of different lenders' product and
criteria changes, so that they know where clients' applications can
be best placed. Many lenders (existing and new) have come to the
market with unique ways of helping clients with more intricate
needs. The specialist lending market has been booming. Equity
release, limited company buy-to-lets, bridging and development
finance are just some of many alternative ways of meeting
Knowledge of the market will give advisers the ability to ensure
their clients receive well-rounded, comprehensive advice. Even if
advice cannot be provided in a specific area, advisers should be
able to identify needs and refer clients on to specialists if