What the Base rate cut means for you
On 10th
March, the Bank of England unanimously decided to reduce interest rates to
bolster the economy amid the coronavirus outbreak. The Monetary Policy Committee
made the emergency decision to cut the Base rate from 0.75% to 0.25% to ‘manage
through an economic shock’.
So, what does
the Base rate cut mean for your finances?
Bank cuts rates in emergency measure
It’s now been more than a decade since the
global financial crisis saw interest rates reduced to record lows.
The last increase to borrowing rates was in August 2018 when the Bank of England Base rate rose to 0.75%. Now, the Bank have decided to cut the Base rate by 50 basis points, back to a record low of 0.25%.
With the coronavirus outbreak spreading, the
Bank said that the measure was designed to support business and consumer
confidence, and reduce the cost and improve the availability of finance.
They added: “Although the disruption arising
from Covid-19 could be sharp and large, it should be temporary. The Bank of
England’s role is to help UK businesses and households manage through an
economic shock. These measures will help to keep firms in business and people
in jobs and help prevent a temporary disruption from causing longer-lasting
economic harm.”
Mortgages
Ten years
of record low interest rates have been great news for mortgage borrowers in the
UK. It’s now possible to benefit from a fixed or tracker rate mortgage at well
under 2% and there is a huge choice of cut-price deals available.
Fierce competition between lenders for new business has also driven down the cost of borrowing. According to financial analysts Moneyfacts, the average cost of a five-year fixed-rate mortgage fell by 0.2% in 2019 alone, from 2.94% to 2.74%.
As the
Bank of England has cut interest rates, you could potentially see the cost of
borrowing reduce even further. If you’re looking to take out a new mortgage in
2020 then the Base rate cut could well lead to more attractive products,
particularly if you’re considering a tracker rate deal that is linked to the
Base rate.
If you
already have a mortgage, how you are affected by the Base rate cut depends on
the type of deal you have:
- Fixed rate – If you are on a fixed-rate deal than the change to the Bank of England Base rate won’t change your monthly repayments
- Tracker rate – If your mortgage is directly linked to the Base rate, then you will see a reduction in your repayments now the rate has been cut. A 0.50% cut in rates would typically see your mortgage rate also reduce by 0.50%
- Variable rate – If your mortgage is linked to your lender’s Standard Variable Rate (SVR) – perhaps because your deal has ended and you’ve reverted to the SVR – then it is possible that your repayments may fall now the Base rate has been cut. Lenders have the discretion to change their SVR as they see fit, although when the Base rate was last cut in 2016 eight of the UK’s top 10 lenders did reduce their SVR by the same amount soon after.
Savings
In
contrast to mortgage borrowers, savers have endured a difficult decade. Finding
an account that paid an interest rate that outstripped inflation has been
difficult, and so savers have struggled to make any decent returns in real
terms.
Indeed, in late February 2020, just 21 savings accounts out of 968 offered an interest rate that beat inflation, according to Moneyfacts research.
Before the
recent cut, easy-access saving rates were at their lowest level for more than
two years at an average of around 0.5%.
This is Money report that there is £770 billion in easy-access accounts paying an average of 0.5%. With inflation at 1.8%, this means savers are missing out to the tune of 1.3%, or £10 billion. There is £167 billion in fixed-rate and notice accounts paying an average of 1.1% — 0.7% below inflation.
Now the Base rate has been cut, expect savings rates to fall. Moneyfacts report that, after the Bank of England reduced the Base rate in 2016, the average savings rate for an easy access bank account fell by 0.14% in the ensuing three months.
Investments
Generally
speaking, a reduction in the Base rate is good news for stock markets as lower
interest rates are considered a stimulant for growth.
Lower
interest rates make it cheaper for consumers to borrow money, and it also
encourages them to spend. Businesses can also borrow more cheaply, enabling
them to finance operations, expansions and acquisitions at a cheaper rate. This
increases their earnings potential and, in turn, leads to higher share prices.
Many
companies, such as utility giants National Grid and SSE, and telecoms firms
such as Vodafone or BT, tend to carry high levels of debt on their balance
sheets. Lower rates can therefore provide a boost as it reduces their cost of
borrowing, making them more profitable.
Get in touch
If you want to know more about the potential impact of the Base rate cut on
your finances, please get in touch. Email info@depledgeswm.com or call (0161) 8080200.
Please note
Your home may be repossessed if you do not keep up
repayments on a mortgage or other loans secured on it.
The value of
your investment can go down as well as up and you may not get back the full
amount you invested. Past performance is not a reliable indicator of future
performance.
