UK Base interest rate
Savers will see their returns fall after the base rate cut. Photograph: Chris Radburn/PA
The Bank of England has cut interest rates, taking the base rate to a new low of 0.25%. This is the first cut, and how welcome it is will depend on your financial situation. The Bank also announced a new round of quantitative easing (QE) – pumping money into the economy to buy government bonds.
What does the cut mean for mortgages?
For anyone with a fixed-rate mortgage, it does not mean anything. But if any of your borrowing is on a variable rate then it’s likely to be good news.
The 1.5 million borrowers with mortgages that track the base rate will see their monthly repayments fall, probably from the start of September. For a homeowner on the average variable mortgage rate of 2.86% and a mortgage of £150, 000, a reduction in line with the base rate will mean monthly repayments falling by £19.68 to £687.
There are no longer any borrowers with tracker rates below the base rate, but there are some people lucky enough to be paying just 0.09% above the Bank base rate. These are Chesham building society customers who took out lifetime tracker mortgages several years ago – their pay rate will fall to just 0.34%.
In the main lenders can chose what to do with their standard variable rates, although Nationwide building society has an old base mortgage rate pegged at 2% above the Bank base rate. It will have to cut that by 0.25%.
What about savers?
They have been suffering since the last interest rate cut and are likely to see returns fall further as a result of the Bank’s decision.
According to financial information firm Moneyfacts, there are 385 savings accounts that could end up offering no interest at all if banks and building societies pass on the whole reduction. It found 60 variable rate accounts on the market paying an interest rate of 0.25% or less, alongside 325 accounts that are closed to new business but still hold customers’ cash.
Sue Hannums from Savingschampion.co.uk says huge numbers of savers have money “languishing in these appalling accounts” and are likely see returns fall.
“I don’t think there are going to be many providers who are going to hold back, ” she says. “Previously, after a rate cut banks and building societies have waited until the end of the month or the beginning of the next to pass on a reduction. However, things have been turned on their head.”
Will other types of borrowing be cheaper?
Don’t expect your overdraft or credit card to get cheaper because of the base rate cut – the interest rates on these types of borrowing are detached from the Bank base rate and have been rising in recent months.
According to the Bank, the average interest rate on a UK credit card is now 17.94%, compared with 15.73% in March 2009, while overdraft rates have gone up from 18.62% to 19.6%. Personal loan rates have tumbled over the same period. The average cost of borrowing £10, 000 was 9.66% when the base rate was last cut and is now 4.3%.
Andrew Hagger of Moneycomms.co.uk says the best-buy loan rates on £10, 000 have fallen by almost five percentage points since the last cut. In 2009, Tesco Bank topped the table with a rate of 8.1%, now Ikano has a deal at just 3.2%.
He does not expect the full 0.25% to be automatically deducted from loan rates. “Competition has been fierce in recent years and lenders margins are already thin, ” he says. “However, we may see one or two banks with a strong appetite for new business perhaps shave 0.1% off their rates to benefit from a better ranking in the best-buy tables.”
Will pensions be affected?
The interest rate cut and pumping more money into the markets by acquiring UK government bonds - a process known as quantitative easing - will hit new retirees and pension funds.
As a result of the Bank’s measures, the price of government bonds, known as gilts, has gone up. Gilts have a fixed rate of return, so as their price rises investors get less income - a lower interest rate - for their money.
Pension funds that offer a payout based on salaries often invest heavily in gilts, and the lower return available means they will face a struggle to meet their promises and deficits could grow. Annuities - the products offering an income for life for pension savers when they retire - are also linked to gilts. Annuity payouts have already fallen, and are set to fall further if returns from gilts remain low.
But there may be one bright note for savers further from retirement - QE could also boost share prices as investors take on more risk in search of returns. This could be good news for anyone building up their pension.
Where can I put my money to get a good savings rate?
Times are tough for savers, but you can do better than a variable rate account paying less than the base rate. Current accounts are offering the best rates, with Nationwide and TSB both offering 5% interest on their everyday accounts, but this applies only to balances of £2, 500 and £2, 000 respectively.
On larger sums you will need to be prepared to lock in your money to get the best rates. Savingschampion says Shawbrook bank is offering 1.55% to savers with at least £1, 000, but the notice period for withdrawals is 120 days. Fixed-term accounts can offer more. Deposit money with Paragon Bank or Al Rayan bank for two years and you can earn 1.8% year, or lock-in with Paragon for three years at a rate of 2%.