With the Bank of England reducing the base rate to just 0.25%, here’s an insight into the likely impact it will have on mortgages, savings, pensions and of course house prices.
Mortgages
If you have a fixed-rate mortgage, then it doesn’t change anything for you unfortunately. However, if any of your borrowing is on a variable rate then its more than likely good news!
Those who will see their monthly repayments fall (probably from the start of this month), are the 1.5 million borrowers with mortgages that track the base rate. 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%!
But 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.
Savers
Although these cuts bring great news to many with a mortgage, it’s not so great news for those that are saving as they are likely to see returns fall further as a result.
Savers have been suffering since the last interest rate cut but according to Moneyfacts, there are 385 savings accounts that could end up offering no interest at all if banks and buildings societies pass on the whole reduction.
Anna Bowes, who runs SavingsChampion.co.uk, says many savings accounts can’t actually accommodate a 0.25% cut because they are already paying rates below that level. She says since Funding for Lending was introduced in 2012 (under which the government gives the banks cheap loans) consumers have had nearly 4,700 cuts to existing savings accounts. “Savers really have been the sacrificial lambs of this downturn. While borrowers have benefited from historically low rates, savers have never known it so bad. However, they must not lose hope as there are still providers that want savers’ cash and are willing to pay a competitive return for it,” she says.
Pensions
It’s pension savers that could be the biggest losers from the cuts though with critics calling it a ‘hammer blow’ to workplace schemes and predict that pension payouts could fall to record lows.
Pensions 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.
Patrick Bloomfield, a partner at Hymans Robertson, said: “[The BoE’s move] is a huge deal for pension funds. There were some that were already under an unprecedented level of pressure. After today, some schemes are going to reach tipping point.”
House Prices
As for house prices, the interest cuts could actually be a good thing and push them up as the low cost of lending may encourage more people to take out mortgages. A fall in bond yields has already started to reduce the cost of 10-year fixed-rate mortgages and fixed-rate deals are either at or near an all-time low across all time periods.