After months of speculation, the inevitable finally happened on 4th August when the Bank of England cut the base rate of interest to just 0.25%. That’s the first change in interest rates since 2009, as the Bank of England decides to give the economy a helping hand in a bid to kick start growth.
A cut in the base rate is regarded as good news for borrowers and bad news for savers, and on balance, is designed to increase the amount of disposable income people have to spend. Of course, the picture is not quite as clear cut as that, as millions of people in the UK are both borrowers and savers, with mortgages to repay, but also savings in the bank.
So what does the base rate cut mean for you?
The Impact on Mortgages
If you have a mortgage then your instant reaction to the base rate cut might have been to rub your hands together with glee. Traditionally, this would have been the case, but the number of people on tracker mortgages – where repayments vary with the Bank of England’s base rate – has fallen considerably over the last few years.
If you are on a tracker mortgage, you can expect a monthly repayment of £700 to fall by about £20, so while you might not be rich overnight, every little helps.
The vast majority of homeowners have a fixed or variable rate mortgage. Those on the standard variable rate will be in the hands of their lender. Some will pass on the cut in full, while others might make no change at all. Those on a fixed rate mortgage will receive no benefit from the base rate cut.
How Will Savers be Affected?
With a base rate of 0.5% since 2009, this further cut will not mean much to savers, who will by now be used to the pitiful returns they can expect. Currently, the average rate of interest on an easy access savings account is just 0.65%. If it follows the base rate, this will drop to 0.4%. For someone with £10,000 saved in such an account, this will result in a fall of gross interest from £65 to just £40 a year. Even those willing to lock their savings away for five years are only currently receiving an average of 1.97% in interest.
Making the Most of the Base Rate Cut
Those likely to benefit the most from the base rate cut – along with those on tracker mortgages – are home movers or those looking to get onto the property ladder for the first time. The base rate cut means there are likely to be even better rates on mortgage products, and therefore, lower mortgage repayments for borrowers.
Currently, homeownership is out of the reach of so many and therefore the rental market is booming, but the base rate cut will make owning a home more attractive. This could also provide the impetus borrowers need to review their current mortgage situation to find the very best deal.
If you’d like to discuss your mortgage options and see if you can take advantage of the record low interest rates, please speak to one of our expert mortgage advisers today!