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As I am currently looking into buying my first house, I am wondering what the implications of the recent Bank of England base rate cut will have on the rates for mortgages available?

I have been keeping an eye on what's available while I've been looking for a house, but following the Bank of England's decision to cut its base rate from 0.75% to 0.25% on 11 March, should I expect mortgage providers to follow suit, and drop the rates for their fixed rate mortgages?

Even at 0.75%, it made sense to fix my mortgage for as long as possible given the rate was so low- but now with the base rate having dropped further, should I expect the rates for fixed rate mortgages to follow suit? If so, it might make sense to hold off on applying for a mortgage for a little while, until this happens? But maybe it's unlikely that the providers will drop the rates any further than they already are? Or does the cut in the base rate only actually effect the tracker mortgage rates?

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  • Just for the sake of fleshing out your question a bit more, are you assuming that all other factors will remain the same in the near term (your creditworthiness, the inventory of available homes, home prices, etc) - in other words, are you literally just asking about interest rate, or the entire home buying situation? – dwizum Mar 16 '20 at 13:48
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    Yes, for the purpose of this question, I'm not interested in the other factors involved in buying a house- it's literally just about the interest rate. – Noble-Surfer Mar 16 '20 at 13:52
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Yes, fixed rate mortgages should/will drop as the bank of England rate drops, it will likely be small though, as banks are already loaning on very thin margins (in some cases in UK housing market, close to if not below inflation).

However, it is worth noting that locking in 'preferential' mortgage rates can be a huge trap: low interest rates generally increase asset values as you're not the only person to think like this - sellers do too when they realise people can borrow more at these lower rates once it filters down into the fixed rates for everyone, with buyers and banks also happy oblige them.

If/when interest rates rise, assets fall in value as the demand shrinks as this process inverts, making you highly exposed to losses if you need to sell before it is paid off. A 'low' monthly interest payment for decades isn't really low or relevant if you spent twice what the asset is now saleable for.

As a result, it is worth being very careful on just how much you are levering up as a result regardless of the rate on offer. In the case of housing this can be exceptionally vicious as the liquidity dramatically dries up during falls, meaning fire sales become much more severe than they are for more liquid assets like stock.

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  • Thanks for the answer- and the insight into the potential risks of buying while interest rates are low- something I hadn't considered, but well worth keeping in mind. – Noble-Surfer Mar 17 '20 at 7:52
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    Key thing as ever with debt is just not to over extend yourself and leave some wiggle room. People with houses often seem to just buy at whatever price range the max the bank will lend them is, which is usually a mistake. – Philip Mar 17 '20 at 9:13

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