How will Bank of England interest rate cut affect my finances?

The Bank of England has decided to lower the interest rate, dropping it from 5.25% to 5%. This is the first decrease since March 2020, after several increases that brought the rate up from a low of 0.1% nearly three years ago.

Is My Mortgage Getting Cheaper?

If you have a fixed interest rate, you don't need to worry about this, and the majority of borrowers fall into this category.

Based on UK Finance data from December, around 6.9 million mortgages for homes were locked in at a fixed rate. This makes up over 80% of all existing home loans. The remaining mortgages included 643,000 on a tracker mortgage linked to the base rate, and 624,000 on a lender's standard variable rate (SVR).

Tracker mortgage customers are the only ones who can count on their payments decreasing. While it is possible that lenders may lower their SVRs, they are not required to do so and may decide to keep their rates the same or only pass on a portion of the reduction.

According to UK Finance's data, the typical tracker mortgage is valued at £136,512 with an interest rate of 6.47%. With a 0.25% decrease, the monthly payment decreases by £28 to £977.

The typical remaining balance on a standard variable rate mortgage is £69,581, with an interest rate of 7.81%. If the complete reduction is implemented, monthly payments will decrease by £14.50 to £663.

You will receive information about how your payments will be different and when this change is expected to happen, most likely in September.

Santander has revealed they will be discontinuing their tracker and SVR-linked deals starting on 3 September, and Coventry building society has announced plans to lower their rates beginning on 1 September.

Considering A New Fixed-rate Mortgage?

These home loans, with interest rates locked in for a certain period like two or five years, are priced based on predictions from the money markets about future interest rate changes, not the current base rate. However, the recent rate cut on Thursday may convince lenders that more cuts are on the horizon, causing mortgage prices to potentially decrease.

Throughout the year, interest rates have fluctuated based on the expectations of the financial market and how willing mortgage lenders are to lend money. Recently, rates have started to decrease, with some five-year deals dropping below 4% last week. It is possible that there will be further reductions in rates soon.

"The lenders have reduced their margins significantly, so this decrease was already included in the fixed rates," explains Simon Gammon, a managing partner at the mortgage brokerage Knight Frank Finance. "However, we have observed that the bigger lenders are willing to sacrifice some profits in order to increase their market share, so we may expect additional slight reductions in the near future."

The Bank's decision was almost tied, and its leader, Andrew Bailey, has cautioned against reducing rates too rapidly or significantly, implying that it is improbable that mortgage expenses will be significantly lowered.

Is It The Right Time To Secure My Savings Rate?

Yes. Just like how mortgage rates are not directly linked to the Bank base rate, the earnings from savings are also affected. The decrease in the Bank base rate on Thursday will probably be applied to a lot of savers with easy-access accounts and those without fixed interest rates.

Interest rates on fixed-savings bonds have been decreasing as the likelihood of interest rate reductions has increased. In September of last year, you could receive over 6% interest on a one-year account and slightly less on a three-year account. However, this past weekend, the top offers were below 5.5% and the typical one-year account yielded 4.64%.

The highest interest rate currently available for a one-year bond is 5.26% with Raisin. However, this rate will decrease to 4.96% by Friday, and it is likely that other competitive rates will also be reduced in the upcoming days.

Loans And Credit Cards: A Closer Look

The interest rates for most personal loans are set and will not change, so if you already have a loan, you will continue paying the same interest rate as when you first took out the loan. While new loans may have lower interest rates, they are not likely to decrease significantly and will still be much higher than they were three years ago.

The interest rates on credit cards have risen in recent years due to an increase in the base rate. Despite this, credit card rates are not directly tied to the base rate, meaning providers are not required to lower rates when the base rate decreases.