This morning, The Bank of England has decided to cut interest rates to a new low of 0.25%, the first cut since March 2009, and depending on your situation, this will either be a welcome move, or not. We look at the likely impact on mortgages and saving rates, pensions and house prices, and what it means for you.
A mortgage is by far the biggest debt taken on by the majority of households in the UK. For those with a fixed rate mortgage, nothing has changed. For those borrowing on variable rates, than today’s interest rate cuts are likely to be good news.
The millions of borrowers with mortgages that track the base rate will now see their monthly repayments drop by on average £22.
While this means lower monthly repayments for anyone who can raise a deposit, it is still unlikely to lead to money pumping into the market. This is because since 2014, borrowers now have to check if people can actually afford mortgage repayments if rates rise.
Because consumers see a cut in their mortgage, combined with a worse return on their savings, it means they are more likely go out and spend, which is the plan by The Bank of England to boost our economy. This also applies to businesses who are more willing to invest.
Savers have struggled since the last interest rate cut and are now likely to see worsened returns fall further as a result of the Bank’s decision.
For example, people with £10,000 saved in such an account, they will receive £40 a year in gross interest, which is £25 less than before the cut.
There will be no effect on the state pension. However, there will be more pressure on the deficits facing defined benefit pension schemes, such as final-salary pensions, putting increased pressure on businesses to close the gap or trim down the accessibility of such pensions.
Furthermore, for those buying an annuity, a retirement income for life, from their defined contribution pension pot may also receive a worse deal.
For those searching for a secure income in their retirement, there is now a temptation to hold off and hope that these rates will improve, although there is no guarantee that this will happen. The long-term health of the economy is arguably the most important element to consider with these new interest cuts
On the flip side, with the expansion of quantitative easing, It could mean a welcome boost in share prices, particularly for UK companies, as investors take on more risk in search of returns. This could be good news for anyone building up their pension, although not all investors will benefit to the same extent.
Although the holiday season is almost at an end, this decision has led another immediate fall in the value of the pound. Although it did slightly recover in recent weeks, it means that UK holidaymakers are getting less for their money when buying foreign currency than last week.