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Bank of England Base Rate Cut to 0.25% - Savings, Mortgages and Pensions

Personal_Finance / UK Interest Rates Aug 04, 2016 - 01:24 PM GMT

By: MoneyFacts

Personal_Finance

The Bank of England’s decision to cut interest rates from 0.50% to 0.25% marks the first interest rate change in over seven years and is the result of market uncertainty stemming from the EU referendum vote. So what does this mean for the average consumer?


Savings

Charlotte Nelson, Finance Expert at Moneyfacts.co.uk, said:

“Today is a bad day to be a saver; savings rates have already plummeted to record lows, so a cut to interest rates is only going to increase savers’ pain.

“Rates have tumbled since the last base rate change; for example, the average easy access account has fallen from 0.94% in March 2009 to 0.55% today, while the average two-year fixed rate bond fell from 2.83% to 1.31% over the same period.

“The base rate cut does not necessarily mean that providers will pass on the reduction to savers, but seeing as rates are already dropping, this latest change will give them yet another opportunity to cut their rates. Anyone considering switching deals will therefore need to do so sooner rather than later.”

Mortgages

Charlotte Nelson, Finance Expert at Moneyfacts.co.uk, said:

“Borrowers have already been enjoying some of the lowest rates on record and the 0.25% cut to the Bank of England base rate will provide further impetus to the rate-cutting trend.

“Thanks to Government lending initiatives and falling SWAP rates, lenders are very keen to attract new customers and retain existing business, which is why the average two-year fixed rate mortgage has fallen from 4.79% in March 2009 to 2.48% today.

“This cut in base rate will also be a significant boon to those currently sitting on their Standard Variable Rate (SVR). Based on the average SVR of 4.80%, today’s cut represents a drop of £28.64* to monthly repayments. However, with fixed rate mortgages still currently sitting at record low rates, borrowers may still be better off looking elsewhere and fixing to a new deal.”

Pensions

Richard Eagling, Head of Pensions at Moneyfacts, said:

“The interest rate cut is not only bad news for those pensioners relying on their savings to generate an income, but also for those on the verge of retirement who may be looking to secure an income through an annuity, as it’s likely to add extra downward pressure on annuity rates at a time when they are already at record lows. The greater demand for gilts could see yields fall further, and since these are used to back annuities, it seems inevitable that annuity rates will take a hit.

“An interest rate cut will also have an adverse impact on the already precarious funding position facing most defined benefit schemes, as lower gilt yields will increase pension liabilities. Employers will need to look at ways of addressing the greater pension deficits that this is likely to create.”

* Based on a £200,000 mortgage over a 25-year term on a repayment only basis.

www.moneyfacts.co.uk - The Money Search Engine

Moneyfacts.co.uk is the UK's leading independent provider of personal finance information. For the last 20 years, Moneyfacts' information has been the key driver behind many personal finance decisions, from the Treasury to the high street.


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