Some readers will remember times in the late 1970s when the UK base rate was as high as 17%.
Now, in an emergency measure to keep the UK economy from suffering significant negative impacts brought about by the coronavirus, the bank of England has gone full circle and seen fit to reduce the base rate to an extreme low of just a quarter of one percent.
This change to the interest rate described by Matt Harris, CEO of SPF Private Clients, as “a bold and decisive move by the Bank of England” is likely to cause mortgage repayment rates to equal the previous record low of 1.29%. Some have even suggested that the repayment rates might sink to an all-time low of less than 1%.
In a similar move, a growing number of lenders have started offering a lifeline to some customers by allowing them “payment holidays” while Covid 19 is still a risk and people may have to take time off work to self-isolate.
People borrowing money will be very happy, especially if they are on a tracker rate where they should see an immediate benefit. Savers on the other hand will experience the opposite situation. The low-interest rates will provide very little incentive for people to save, and those with a sizable amount of money already in the bank will also feel the pinch because of the lower than expected rates.
Banks lending money, mortgage providers and similar organisations are already struggling with slim profit margins and now they will be experiencing even more pressure.
By reducing interest rates, the Bank of England hopes to encourage people to go out and spend their money, rather than putting it in the bank and saving for a rainy day. Increased consumer spending will boost the UK’s economy by creating more demand for goods and services, which in turn will cause more money to filter through the economy and hopefully keep us in growth.
It also means that those looking for a cheap mortgage will have a window of opportunity in which to gain a very favourable repayment rate.