The base rate has been reduced from 5% to 4.75% in what will be welcome news for millions of homeowners who’ve seen their mortgage costs spiral over the past two years
Interest rates have been cut by the Bank of England for the second time this year.
The base rate has been reduced from 5% to 4.75% in what will be welcome news for millions of homeowners who’ve seen their mortgage costs spiral over the past two years. But it isn’t all positive news – a cut in interest rates normally means savings rates will go down.
The base rate influences how much banks charge you when you borrow money, as well as the return you get on your savings. At its highest point, the base rate reached 5.25% in August 2023 and it remained at this level until August 2024 when it was cut to 5%. The Bank of England paused the base rate at 5% at its September meeting.
Economists had widely predicted it would be cut again today to 4.75% after inflation fell below the Bank of England target to 1.7%. The Bank of England had been raising interest rates to bring down inflation, with the theory being that if people have less money to spend, this would bring down demand for goods and lower prices.
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How it impacts your mortgage
It all depends on the type of mortgage you have. Those with a tracker mortgage will see their repayments will go down as these type of deals move in line with the base rate. Research from TotallyMoney and Moneycomms shows the average UK homeowner with a 75% loan to value on a tracker mortgage will see their monthly mortgage payment reduce by £32.
But it’s important to remember that these households have seen their mortgage costs rise substantially over the past couple of years, following the previous Bank of England rate hikes. If you have a standard variable rate (SVR) mortgage then your deal can be changed whenever your lender decides, although these tend to move roughly in line with the base rate as well.
You’ll usually be moved to the SVR of your existing lender once your current mortgage deal ends. More than 1.2 million people are on a tracker or SVR mortgage. If you have a fixed rate mortgage, your payments won’t change today as you’ve already agreed to pay a fixed amount each month for a set period of time.
However, when you need to remortgage, you may find your new deal is more expensive compared to your current mortgage. Around 700,000 fixed rate deals are due to end in the second half of this year, according to UK Finance. It is worth comparing rates to make sure you’re getting the best deal.
Ben Thompson, deputy CEO at Mortgage Advice Bureau, said: “Another rate cut is starting to move the dial back again in the borrower’s favour, following an eventful week or so since the budget. We could see swap rates and, consequently, mortgage rates fall, subject to markets settling further following the budget and the outcome of the US election also.
“Our data shows that falling rates have already impacted borrower preference. Last month, over half (54%) of borrowers opted for a five-year fixed rate, an increase of 11% versus the same period last year, clearly showing a change in customer mindset. It will be interesting to look again at this after the dust has settled following the Budget and the outcome of the US election.”
How it impacts credit cards and loans
If your credit card is specifically linked to the base rate, then how much you pay back in interest can be affected when it rises or falls. Check your terms and conditions to see if this applies to you. If your credit card rate is changing, you should get 30 days’ notice from your lender.
Credit card rates are normally variable, which means they can change over time anyway. You’ll also find the rates available now if you’re taking out a new card are more expensive compared to before the first rate hike. The average credit card purchase APR in October was 35.4%, according to Moneyfacts.
Holly Tomlinson, financial planner at Quilter, said: “Lower interest rates can lead to reduced annual percentage rates (APRs) on credit cards, making it less expensive to carry a balance. However, it’s important to note that credit card rates are influenced by various factors, and not all lenders may pass on the full benefit of the rate cut. Cardholders should monitor their accounts and consider transferring balances to cards with more favourable terms if possible.”
Interest rates on personal loans and car financing are normally fixed, but again, check with your lender to be absolutely certain. The rates on new loans are also higher now compared to last year. Moneyfacts says the average loan interest rate for someone borrowing £7,500 is 8.7%.
How it impacts your savings
It is likely savings rates will drop now the base rate has been cut again – so check now for the best deals. Cash ISAs currently pay more than easy-access accounts and the best rate is 5.17% from Trading 212. An ISA protects your savings interest from tax but you can only put away £20,000 each tax year.
The top-rate easy-access account today is from Chip and this pays 5% – however, you’re only allowed three withdrawals a year. The best notice account is Oxbury and this pays 5.15% with a 90-day notice period. For those who can lock their cash away, Atom Bank offers a rate of 5% for six months or 4.8% for one year.
Regular savings accounts offer the best rates, but you’re normally only allowed to make small deposits each month and some accounts restrict how many withdrawals you can make. Principality Building Society pays 8% fixed for six months but you can only deposit up to £200 each month.
Alice Haine, personal finance analyst at Bestinvest by Evelyn Partners, said: “A rate cut is less of a boon for savers who have been enjoying a savings sweet spot in recent months when easing inflation collided with still-high interest rates delivering a real return for more accounts. Those that want to preserve their return must move fast by locking in the best deal possible while interest rates remain on the higher side.
“This is particularly important for anyone with money idling in a current account or an old savings account offering a dismal return. With saving rates above the 5% mark becoming increasingly rare, those with cash to spare should act now to secure bumper returns, particularly as the value of any money not working hard will erode over time once inflation is factored in.”
