UK interest rates have been cut from 0.5% to 0.25%, a new record low. With suggestions that this could go even lower, what does this mean for the housing and construction sector?
We cut through the jargon to give you a no-nonsense overview.
What are interest rates?
Interest rates are the proportion of a loan charged to the borrower as interest. The Bank of England base rate is announced by the Bank of England's Monetary Policy Committee and is used when calculating the interest on financial products.
Why have they been slashed?
Following the Brexit vote there have been concerns about an economic slowdown, slashing interest rates is seen as a way of encouraging activity.
What does the interest rate cut mean for housing and construction?
Construction and housing activity is closely linked to the strength of the economy. So whilst interest rate changes impact on the overall economy it is important to remember that the overall economic and political situation will have a greater overall effect.
Having said that this change will have some direct effects:
- Cheaper mortgage rates – If the reduced rate is passed on to home buyers then this could make it cheaper for homebuyers to secure a mortgage. In the past some lenders have been slow to pass on the reduction but some banks have already confirmed that this reduction will be passed on. Reduced mortgage costs could see an increase in potential buyers.
- Cheaper lending – Similarly to mortgage rates a reduction in the base rate is likely to be reflected in reduced commercial lending costs. Much of the UK’s construction projects are financed through lending, so a reduction in rates could promote an increase in construction projects.
- Reduced interest on savings –on the flip side, reduced interest rates will result in less interest being earnt by savers. In fact some banks have warned that further reductions in interest rates could see them charge for money held in accounts! This could reduce the ability of people to save deposits to purchase new homes. Alternatively the reduced returns could see savers investing in property instead, another potential driver for increased housing demand.
Following the Brexit vote one thing seems to be certain…uncertainty! Whilst the reduced interest rates bring some immediate positives we will have to wait and see how the overall economy reacts and the effect on construction.
By Craig Ross