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MILLIONS of mortgage bills are set to fall after the Bank of England (BoE) slashed interest rates this afternoon.
At today’s Monetary Policy Committee (MPC) meeting, the Bank of England‘s rate-setters lowered the base rate from 4.25% to 4%, marking the fifth interest rate cut since 2020.
The decision means lower mortgage payments for homeowners but could also lead to smaller returns for savers.
That’s because the base rate impacts the interest rates banks offer on savings accounts and loans, including mortgages.
It’s a win for borrowers, after the MPC voted to keep interest rates unchanged at 4.25% at its last meeting in June.
The Bank of England (BoE) last kept rates steady at 4.25% in June, after cutting them from 4.5% to 4.25% in May.
Economists expected the rate cut, pointing to a slowing UK jobs market and weak economic growth as reasons for the move.
Recent figures from the Office for National Statistics (ONS) revealed UK unemployment rose to 4.7% in the three months to May – the highest it’s been in four years.
And average earnings growth, excluding bonuses, slowed to 5% in the period to May to its lowest level for almost three years.
Meanwhile, recent survey data, watched closely by economists, has indicated that firms are grappling with higher labour costs and wider geopolitical uncertainty weighing on investment plans.
Lowering interest rates can make borrowing cheaper, encouraging both consumer spending and business investment to support economic recovery.
However, the BoE also uses interest rates to control inflation, aiming to keep the Consumer Price Index (CPI) at 2%.
The Office for National Statistics (ONS) reported that CPI inflation jumped to 3.6% in the 12 months to June.
Keeping interest rates steady helps tackle rising prices, but the BoE has to balance controlling inflation with boosting the economy.
Today’s rate cut is seen as focusing more on supporting economic growth than keeping inflation in check.
Here’s how today’s decision affects your money.
Millions will see mortgages fall
When interest rates fall, mortgage rates typically follow suit.
That’s because the base rate is used by lenders to set the interest rates they offer customers on savings and borrowing, including mortgages.
However, the timing of when you will see the reduction depends on the type of home loan you have.
Those on tracker and standard variable rate (SVR) mortgages usually experience an immediate change in payments, or very shortly after.
There are 591,000 customers on tracker mortgages and 540,000 on SVRs.
A 0.25% cut to base rates would mean an average SVR mortgage would fall by £170 a year, while those on tracker deals will see a £350 a year drop.
Most mortgage holders, more than 7.1million, are on fixed deals so they won’t see any change until their deal ends.
However, more than 1.6 million fixed-rate mortgages are set to expire this year, meaning many homeowners could face higher rates due to recent interest rates climbing to 6% in recent years.
Experts don’t expect rates to return to the record lows of 1-2%, but lenders have recently been cutting rates, with two-year deals now at their lowest in nearly three years.
The average interest rate for a two-year fixed mortgage is now 5%, dropping by 0.09% in the past month, according to moneyfactscompare.co.uk.
Two-year mortgage rates haven’t been this low since September 2022, when they were 4.24%.
Similarly, the average rate for a five-year fixed mortgage is 5.01%, down by 0.08% over the past month.
How to get the best deal on your mortgage
IF you’re looking for a traditional type of mortgage, getting the best rates depends entirely on what’s available at any given time.
There are several ways to land the best deal.
Usually the larger the deposit you have the lower the rate you can get.
If you’re remortgaging and your loan-to-value ratio (LTV) has changed, you’ll get access to better rates than before.
Your LTV will go down if your outstanding mortgage is lower and/or your home’s value is higher.
A change to your credit score or a better salary could also help you access better rates.
And if you’re nearing the end of a fixed deal soon it’s worth looking for new deals now.
You can lock in current deals sometimes up to six months before your current deal ends.
Leaving a fixed deal early will usually come with an early exit fee, so you want to avoid this extra cost.
But depending on the cost and how much you could save by switching versus sticking, it could be worth paying to leave the deal – but compare the costs first.
To find the best deal use a mortgage comparison tool to see what’s available.
You can also go to a mortgage broker who can compare a much larger range of deals for you.
Some will charge an extra fee but there are plenty who give advice for free and get paid only on commission from the lender.
You’ll also need to factor in fees for the mortgage, though some have no fees at all.
You can add the fee – sometimes more than £1,000 – to the cost of the mortgage, but be aware that means you’ll pay interest on it and so will cost more in the long term.
You can use a mortgage calculator to see how much you could borrow.
Remember you’ll have to pass the lender’s strict eligibility criteria too, which will include affordability checks and looking at your credit file.
You may also need to provide documents such as utility bills, proof of benefits, your last three month’s payslips, passports and bank statements.
Credit Card APRs could go down
When the base rate is lowered, the cost of borrowing through loans, credit cards and overdrafts can fall.
However, certain loans, such as personal loans or car financing, usually stay the same, as you have already agreed on a rate.
These cuts don’t happen as quickly as mortgage rates and we might need to see several rate cuts before they start to fall.
Also multiple factors influence credit card rates, and not all lenders may fully pass on the benefits of the rate cut.
Rachel Springall, finance expert at moneyfactscompare.co.uk, said: “Lenders traditionally reassess the rates they charge on debts as a reflection of their attitude to risk, as when the risk of defaults is elevated, the cost to borrow would usually rise.”
Your lender will let you know before making any changes.
How can I find the best credit card rates?
YOU should always use an eligibility calculator before applying for credit.
That’s because every credit card application leaves a mark on your credit file and can affect your credit score.
To assess all the available cards, visit price comparison websites like MoneySavingExpert’s Cheap Credit Club or Compare the Market.
Once you run your details through an eligibility calculator and you’ve been shown that you’re likely to be accepted, make a formal application.
To do this, you will need to provide your name, address and email address as well as details of your income so a provider can assess your eligibility.
You will also need to provide details of how much money you want to transfer to the new card, but you can often do this after you have been accepted.
If your application is approved, you will need to transfer the balance within a set period, usually around 60 or 90 days.
Your old balance will then be cleared and you can start making interest-free repayments on your new card.
Rate cuts add pain for savers
While rate rises have been painful for borrowers, savers have benefited from them.
This is because banks tend to battle it out to offer market-leading rates.
However, banks are usually much slower to pass on higher rates to savers.
When interest rates are cut, savings accounts usually offer lower returns.
Since August 2024, average rates for easy access and notice accounts have declined.
The average easy access rate dropped from 3.15% to 2.68%, while notice account rates fell from 3.9% to 3.63%.
Rachel Springall, finance expert at moneyfactscompare.co.uk, said: “Savings rates are getting worse and base rate reductions spell further misery for savers.
“It is essential that savers do not wait around for too long to snap up the top rates on the market, particularly if they use their pots to supplement their monthly income.
“Loyalty does not pay, so it is crucial savers look towards building societies and challenger banks for better savings returns.”
The Big Five Banks (Barclays, NatWest, HSBC, Lloyds, and Santander) are paying an average of just 1.17% interest on their savings accounts, according to TotallyMoney.
Luckily, some savings accounts still pay over 5%. For example, Chip’s Instant
Access Saver gives 5.1% interest, and you can start saving with just £1.
If you save £5,000 in this account for a year, you’ll earn £255 in interest.
But don’t expect these deals to last for long.
How can I find the best savings rates?
WITH your current savings rates in mind, don’t waste time looking at individual banking sites to compare rates – it’ll take you an eternity.
Research price comparison websites such as Compare the Market, Go Compare and MoneySupermarket.
These will help you save you time and show you the best rates available.
They also let you tailor your searches to an account type that suits you.
As a benchmark, you’ll want to consider any account that currently pays more interest than the current level of inflation – 3.6%.
It’s always wise to have some money stashed inside an easy-access savings account to ensure you have quick access to cash to deal with any emergencies like a boiler repair, for example.
If you’re saving for a long-term goal, then consider locking some of your savings inside a fixed bond, as these usually come with the highest savings rates.
Annuity rates may fall
The BoE’s base rate also impacts pensioners looking to buy an annuity.
A pension annuity converts your pension pot into a guaranteed regular income for the rest of your life.
However, because annuity rates are linked to the cost of government borrowing, any rise or fall in the BoE’s base rate can impact the rate you receive.
The income you receive can be locked in on the day you purchase your annuity, so current annuity rates can make a big difference to your long-term financial security.
However, Holly Tomlinson at Quilter said: “Annuity rates are closely tied to government bond yields, which can be affected by interest rate changes.
“A reduction in the base rate may lead to lower bond yields, potentially resulting in less favourable annuity rates for retirees.
“Those approaching retirement should seek financial advice to assess the best timing for purchasing annuities and consider alternative retirement income strategies where appropriate.”
