The Bank of England cut Interest Rates down to 0.25%. But you may ask, how will this affect you on a day to day basis? Well in this post I will go over the main situations.
Mortgages
This is the area where there is potentially good news. The average amount left on a mortgage in the UK is £116,000, according to the Council for Mortgage Lenders. The Office of National Statistics estimates that there are over 11 million people with mortgages. Based on this figures, a cut to 0.25% means a £22 monthly reduction in the bill for a variable 25-year repayment mortgage. This is based on a £211,000 home with a 20% deposit.
The important bit to remember though is that not everyone with a mortgage will benefit from the interest cut. This depends on what mortgage you have.
All those on a tracker mortgage will see an immediate benefit. The interest rate they pay is directly linked to the Bank of England’s Base rate. One in 5 mortgage holders have a tracker mortgage.
Almost a third of mortgages are based on the standard variable rate. Whilst the banks and building societies do not have to alter their Standard Variable rate, it is likely that they will do so to remain competitive. Timescales as to when this will happen will vary from lender to lender.
The remainder of mortgage holders (almost half at 46%) are on fixed rate mortgages. As they are in a fixed rate, the reduction in the Bank of England Base Rate will not be passed on to them. Whilst it is possible to leave a fixed rate early, you will likely incur significant charges so unless you have got a very bad rate, it usually makes sense to wait until it comes to an end.
Whilst it is difficult to predict the future, interest rates are likely to remain low for the short to medium term. Remember rates had been at 0.5% for over 7 years before the latest reduction.
Savings
A Bank Rate Cut is bad news for savers.
Saving rates have been low for years now and even before the interest rate cut, savings rates have dropped. The average rate for easy access savings is 0.65% and this is likely to reduce to around 0.4%.
Pensions
As well as reducing the Base Rate, the Bank of England also added further stimulus measures by purchasing government and corporate bonds. This will not affect the state pension. However, it will add extra pressure on the deficits of defined benefit pension schemes (e.g. final-salary pensions).
Those who are buying an annuity (a retirement income for life) may also now get a worse deal.
The flipside is that share prices have been driven up by the Bank’s decision. This means those still paying into a private pension – and investors in general – will see a boost in the value of these investments. Of course, pensions and other investments are long-term so the long-term health of the economy is the most important element to consider.